Tax Questions

Self Study And SSS Problems For Chapters 1 to 10 Volume 1 Page 1
Self Study And SSS Problems For Chapters 1 to 10
To provide practice in problem solving , these are the Self Study Problems for Volume 1 which
includes Chapters 1 to 10. The detailed solutions to these problems are available in both the
print and online Study Guide.
For additional practice in problem solving , there are Supplementary Self Study Problems with
detailed solutions available for each chapter. These problems and solutions are available in
this file after the Self Study problems for each Chapter.
Canadian Tax Principles - Self Study And SSS Problems (2018/2019)

Chapter 1 Self Study Problems Volume 1 Page 2
Self Study Problem One - 2
Chapter 1 Self Study Problems

(Regressive Taxation)
A regressive tax can be described as one which is assessed at a lower rate as income levels
increase. Despite the fact that the Harmonized Sales Tax (HST) is based on a single rate, it is
referred to as a regressive form of taxation.
Required: Explain how a tax system with a single rate can be viewed as regressive.
SOLUTION available in printed and online Study Guide.

(Flat Rate Tax)
At a recent cocktail party, Mr. Right was heard complaining vehemently about the lack of prog-
ress towards tax simplification. He was tired of spending half of his time filling out various CRA
forms and, if the matter were left to him, he could solve the problem in 10 minutes. “It is
simply a matter of having one tax rate and applying that rate to 100 percent of income.”
Required: Discuss Mr. Right’s proposed flat rate tax system.


(Qualitative Characteristics)
In recent years, the government has introduced a number of changes in tax legislation related
to individuals. A selected group of these measures can be described as follows:
Family Tax Cut This provision provided a tax reduction based on a limited amount
of income splitting . Specifically, a separate calculation of Tax Payable was based on
the assumption that up to $50,000 of Taxable Income was transferred from a higher
income spouse to a lower income spouse. It was only available to couples with a child
under the age of 18. This provision was repealed in 2016.
Lifetime Capital Gains Deduction An increase in the provision to remove from
Taxable Income, capital gains on the disposition of a qualified farming or fishing prop-
erty from $813,600 (2015 limit) to $1,000,000.
Home Accessibility Tax Credit A new credit against Tax Payable equal to 15
percent of up to $10,000 in expenditures made by seniors and disabled people to gain
access to, be more mobile within, or reduce the risk of harm within, their home.
Small Business Rate A reduction scheduled for 2016 (2 years in the future) in the
federal tax rate on active business income earned by Canadian Controlled Private
Companies. The rate was reduced from 11 percent of Taxable Income to a new rate
equal to 10.5 percent of Taxable Income.
Increase In Tax Free Savings Account (TFSA) Limits The TFSA provision allows
non-deductible contributions to be made to a registered account where earnings
accumulate on a tax free basis. Withdrawals from these accounts are not taxed. The
annual limit on contributions to Tax Free Savings Accounts (TFSAs) was increased from
$5,500 to $10,000 for 2015. This increase was reversed in 2016.
Required: Analyze each of the described changes using two of the qualitative characteris-
tics of tax systems that are listed in your text. For your convenience, the list of qualitative
characteristics presented in the text is as follows:
• equity or fairness
• neutrality
• adequacy
• elasticity
• flexibility
• simplicity and ease of compliance
• certainty
• balance between sectors
• international competitiveness


(Sources Of Tax Information)
The principal source of Canadian income tax information is the Income Tax Act. There are,
however, other sources that are of considerable significance in the application of these rules.
Required: List and briefly describe these other sources of information on Canadian income
tax matters.

(Residential Ties)
Paul Brossard accepts an offer to move to the U.S. from Canada to become a manager for a
revitalized Black Hills Gold Savings and Loan branch in South Dakota. Paul has resigned from
his Canadian federal government position, and severed his professional association ties.
Further, he purchased a home in South Dakota. However, his daughter is nearing completion
of an elite French immersion secondary school program in Ottawa, so Paul’s wife and
daughter intend to remain in Canada for two years. They continue to live in the family home in
Ottawa.
After six months in South Dakota, the Savings and Loan branch closed. Paul then sold the U.S.
home and moved back to Canada.
Required: Assess whether or not Paul became a non-resident of Canada, and if Paul will be
taxed in Canada for the period during which he was living and working in the U.S.

(Part Year Residency Of Individuals)
The following facts relate to three individuals who spent a part of the current year in Canada:
Mr. Aiken Mr. Aiken is a businessman and a U.S. citizen who moved to Canada and
established residence in the middle of June. After the move, he spent the remaining
192 days of the year in Canada.
Mr. Baker Mr. Baker is a businessman and a Canadian citizen who moved out of
Canada in the middle of July and established residence in the U.S. Prior to his move,
he spent the preceding 192 days of the year in Canada.
Mr. Chase Mr. Chase is a professional athlete and a U.S. citizen. His residence is
located in Nashville, Tennessee, and during most of the year his wife and children live
in that city. Mr. Chase plays for a Canadian team and, during the current year, his work
required him to be in Canada for a total of 192 days.
Required: All of the preceding individuals were in Canada for a total of 192 days. Explain
their residence status for income tax purposes in the current year and their liability for Cana-
dian income taxes.


(Residency Of Individuals)
Determine whether the following persons are Canadian residents for the current year. Explain
the basis for your conclusion. Ignore any possible implications related to tax treaties.
A. Jane Smith was born in Washington, D.C., where her father has been a Canadian ambas-
sador for 15 years. She is 12 years old, has no income of own, and has never been to
Canada.
B. Marvin Black lives in Detroit, Michigan. He works on a full time basis throughout the year
in Windsor, Ontario.
C. John Leather was born in Canada and, until September 12 of the current year, he has
never been outside of the country. On this date, he departed from Canada and estab-
lished a home in Savannah, Georgia.
D. Francine Donaire is a citizen of France and is married to a member of the Canadian armed
forces stationed in France. She has been in Canada only on brief visits since she and her
husband have been married, and had never visited the country prior to that time. She is
exempt from French taxation because she is the spouse of a member of the Canadian
armed forces.
E. Robert Green lived most of his life in Texas. In January of the current year, he moved to
Edmonton to take a high paying job with a local oil exploration company. As he found the
weather to be too cold in Edmonton, he resigned during September and returned to Texas
before having to suffer through another winter.
F. Susan Allen is a Canadian citizen who has lived in New York City for the past 7 years.

(Residency Of Corporations)
Determine whether the following corporations are Canadian residents for the current year.
Explain the basis for your conclusion.
A. AMT Ltd. was incorporated in New Brunswick in 1964. Until 1993, all of the directors’
meetings were held in that province. However, since that time, the directors have met on
a regular basis in Portland, Maine.
B. UIF Inc. was incorporated in the state of Montana in 1968. However, until four years ago
all of the directors’ meetings were held in Vancouver, British Columbia. Four years ago,
the president of the Company moved to Helena, Montana and since that time all of the
directors’ meetings have been held in that city.
C. BDT Ltd. was incorporated in Alberta in 1995. However, it is managed in North Dakota,
where all directors’ and shareholders’ meetings have been held since incorporation.
D. QRS Inc. was incorporated in New York state. However, all of the directors are residents
of Ontario and all meetings of the Board of Directors have been held in that province since
incorporation.


(Residence - Individuals And Corporations)
For each of the following persons, indicate how they would be taxed in Canada for the current
year. Your answer should explain whether the person is a Canadian resident, what parts of
their income would be subject to Canadian taxation, and the basis for your conclusions.
A. Mr. Samuel Salazar lives in Detroit, Michigan and is a full time employee of a business in
Windsor, Ontario. His responsibilities with the business in Windsor require him to be
present for about eight hours per day, five days per week. His annual salary in his Windsor
position is $72,000 per year.
B. Mr. John Wills is a Canadian citizen who, until September 1 of the current year, had spent
his entire life living in Regina. On September 1 of the current year, after disposing of all of
his Canadian property, Mr. Wills moved his entire family to Bismarck, North Dakota
where he opened a mixed martial arts school.
C. Joan Brothers was born in Livonia, Michigan. She is seven years old and has never visited
Canada. She has no income of her own. Her father has been consul in the Canadian
Consulate in Livonia for the past 15 years. He was a resident of Canada immediately prior
to his appointment as consul.
D. Brogan Inc. was incorporated in Montana in 1991, but until five years ago, all of the direc-
tors’ meetings were held in Calgary, Alberta. Five years ago, the president of the Company
moved to Butte, Montana and since that time all of the directors meetings have been held
in Butte.
E. Mercer Ltd. was incorporated in British Columbia in 1963 and all of its directors’ meetings
were held in Vancouver until May, 1995. In June, 1995, all of the directors moved to Port-
land, Oregon and all subsequent directors’ meetings were held in Portland.
F. The Booker Manufacturing Company was incorporated in 1963 in Minnesota. The direc-
tors of the Company have always been residents of Winnipeg and, as a consequence, all
meetings of the Board of Directors have been held in Winnipeg since the Company was
first incorporated.


(Net Income For Tax Purposes)
The following two Cases make different assumptions with respect to the amounts of income
and deductions of Mr. Morris Dorne for the current taxation year:
Case A Mr. Dorne had employment income of $50,000 and interest income of
$12,000. His unincorporated business lost $23,000 during this period. As the result
of dispositions of capital property, he had taxable capital gains of $95,000 and allow-
able capital losses of $73,000. His Subdivision e deductions for the year totalled
$8,000. He also experienced a loss of $5,000 on a rental property that he has owned
for several years.
Case B Mr. Dorne had employment income of $45,000, net rental income of
$23,000, and a loss from his unincorporated business of $51,000. As the result of
dispositions of capital property, he had taxable capital gains of $25,000 and allowable
capital losses of $46,000. His Subdivision e deductions for the year amounted to
$10,500. Fortunately for Mr. Dorne, he won $560,000 in a lottery on February 24.
Required: For both Cases, calculate Mr. Dorne’s Net Income For Tax Purposes (Division B
income). Indicate the amount and type of any loss carry overs that would be available at the
end of the current year, or state that no carry overs are available.

(Net Income For Tax Purposes - Four Cases)
The following four Cases make different assumptions with respect to the amounts of income
and deductions of Karl Marks for the current year:
Case A Case B Case C Case D
Employment Income $73,300 $41,400 $89,400 $34,300
Income (Loss) From Business ( 14,700) ( 4,700) ( 112,600) ( 47,800)
Rental Income (Loss) 8,300 5,900 5,300 ( 20,100)
Taxable Capital Gains 42,400 7,800 23,700 24,700
Allowable Capital Losses ( 18,600) ( 11,600) ( 21,200) ( 26,300)
Subdivision e Deductions ( 6,200) ( 2,800) ( 22,400) ( 6,400)
Required For each Case, calculate Mr. Marks' Net Income For Tax Purposes (Division B


and deductions available to Mr. Emerson Comfort for the current taxation year:
Case 1
During the year, Emerson has net employment income of $123,480, interest income
of $4,622, and taxable capital gains of $24,246. He has allowable capital losses of
$4,835. He has deductible child care costs of $9,372.
Case 2
During the year, Emerson has net business income of $72,438 and a net rental loss of
$9,846. His taxable capital gains for the year total $4,233, while his allowable capital
losses for the year are $7,489. Because of his very high Earned Income in the previous
year, he is able to make $22,000 deductible RRSP contribution.
Case 3
During the year, Emerson has net employment income of $47,234 and a net business
loss of $68,672. Capital gains for the year total $12,472 while capital losses are real-
ized in the amount of $9,332. He has deductible child care costs of $3,922.
Case 4
During the year, Emerson has interest income of $6,250, net business income of
$43,962, and capital gains of $12,376. He also has a net rental loss of $72,460 and
capital losses of $23,874. As he moved to a new work location during the year, he has
deductible moving expenses of $7,387.
Required For each Case, calculate Emerson's Net Income For Tax Purposes (Division B

Chapter 1 Supplementary Self Study (SSS) Problems Volume 1 Page 9
SSS Problem One - 1
Chapter 1 Supplementary Self Study (SSS) Problems

The solutions to these Chapter 1 SSS Problems can be found following the SSS
Problems for this Chapter.
SSS Problem One - 1

(Qualitative Characteristics)
With the growing importance of free trade and e-commerce, Canada is contemplating
increased harmonization of the Canadian tax system with other major tax regimes in the
world. Harmonization with the United States is the first priority, with harmonization with
other major economic groups being secondary. Assume the following changes are proposed:
A. Taxing all e-commerce transactions based on where the goods and services are delivered.
B. Full deduction of mortgage interest related to principal residences, combined with taxa-
tion of capital gains arising on dispositions of these residences. Currently in Canada, the
capital gains on the disposition of principal residences are not taxed and mortgage interest
related to principal residences is not deductible.
C. Requiring corporations that are under common control to file a single consolidated tax
return for all of the corporations in the group.
D. Conversion of the GST system into a national sales tax to be applied to the sale of goods
and services at the retail level.
Required: Indicate a significant tax advantage, other than the benefits associated with
international harmonization, that would result from introducing each of the proposed
changes. In addition, analyze each proposed change using two of the qualitative characteris-
tics of tax systems that are listed in your text.
For your convenience, the list of qualitative characteristics presented in the text is as follows:
• equity or fairness
• neutrality
• adequacy
• elasticity
• flexibility
• simplicity and ease of compliance
• certainty
• balance between sectors
• international competitiveness

SSS Problem One - 2
SSS Problem One - 2

(Residency Of Individuals And Corporations)
For each of the following persons, indicate how they would be taxed in Canada for the year
ending December 31, 2018. Your answer should explain whether the person is a Canadian
resident and the basis for your conclusions.
A. Martin Judge was born in Kamloops, British Columbia in 1988. In 1993, Martin’s family
moved to southern California and, until October 1, 2018, Martin did not return to
Canada. On October 1, 2018, Martin accepted a position with an accounting firm in
London, Ontario. He returned to Canada and began working at his new job on this date.
B. Ms. Gloria Salinas is a Canadian citizen who, on November 1, 2018, is appointed as

Canada’s new ambassador to Mexico. While Ms. Salinas was born in, and grew up in,
Nova Scotia, she has resided in Mexico for the last 15 years. She anticipates that she will
continue to live in Mexico subsequent to her appointment as the Canadian ambassador.
C. Roberto Salinas is the 12 year old son of Ms. Gloria Salinas (see Part B). Roberto has lived
with his mother in Mexico since his birth.
D. Kole Ltd. was incorporated in Alberta in 1962 and, until December 31, 2013, carried on
most of its business in that province. However, on January 1, 2013 the head office of the
corporation moved to Oregon and the Company ceased doing business in Canada in all
subsequent years.
E. Forman Inc. was incorporated in Syracuse, New York during 2016. However, the head
office of the corporation is in Smith Falls, Ontario and all meetings of the Board of Direc-
tors are held in that city.

SSS Problem One - 13
SSS Problem One - 13

(Residency/Dual Residency - Individuals)
Determine the residency status of the two individuals in the following Cases. Use the
tie-breaker rules found in the Canada/U.S. tax treaty where appropriate.
Case A Brad is a U.S. citizen who has been living in Seattle, Washington. Through
an online dating service, he meets Sarah in 2017. She is a Canadian citizen who lives
and works in Vancouver. After several face-to-face meetings they conclude that they
should marry and, after much discussion, they decide that they will live in Seattle after
the marriage. Since Sarah is committed to remaining in her position in Vancouver
until September, 2018, in December, 2017, Brad takes a 10 month leave of absence
from his job and gives up his apartment in Seattle. On January 1, 2018, they move in
together sharing an apartment in Vancouver which is leased on a month-to-month
basis. On September 15, 2018, they get married, terminate the Vancouver lease, and
move to a newly purchased house in Seattle.
Case B Helen is a single individual who makes her living painting portraits of
wealthy individuals. She is a U.S. citizen and has, in recent years, worked in
Burlington, Vermont. Of late, business has dropped off and, as a consequence, she
decided to try working in Montreal. Because of the uncertainty involved in her line of
work, she does not sell her Burlington residence, asking a friend to watch it while she
is absent. On April 15, 2018, she moves to Montreal. She lives in various Montreal
hotels until January 15, 2019. At this time she concludes that the work situation is no
better in Montreal than it was in Burlington. Given this, she returns to Burlington.

SSS Problem One - 5
SSS Problem One - 4

(Net Income For Tax Purposes - Two Cases)
The following two Cases make different assumptions with respect to the amounts of income
and deductions for the current year for Christophe Szabo, a Canadian resident.
Case A Christophe has employment income of $46,700, interest income of $3,500,

a net rental loss of $22,250, and a net business loss of $37,260. Dispositions of capital
property during the current year had the following results:
Taxable Capital Gains $13,470
Allowable Capital Losses 10,540
Christophe paid deductible spousal support of $500 per month. His cash position was
significantly improved when he won a provincial lottery prize of $450,000 during the
year.
Case B Christophe had employment income of $75,400, interest income of

$4,560, and a net rental loss of $12,200.
Dispositions of capital property during the current year had the following results:
Allowable Capital Losses 9,460
Subdivision e deductions for the current year were child care costs of $4,520, RRSP
contributions of $6,570, and spousal support payments of $3,600.
Required: For both Cases, calculate Christophe’s Net Income For Tax Purposes (Division B
end of the current year.
SSS Problem One - 5

and deductions of Jonathan Oakley for the current year:
Case A Case B Case C Case D
Employment Income $83,000 $92,000 $46,000 $57,000
Income (Loss) From Business ( 22,000) ( 22,000) 21,000 16,000
Rental Income (Loss) 12,000 16,000 ( 42,000) ( 92,000)
Taxable Capital Gains 81,000 18,000 22,000 31,000
Allowable Capital Losses ( 35,000) ( 32,000) ( 53,000) ( 35,000)
Subdivision e Deductions ( 15,000) ( 12,000) ( 16,000) ( 17,000)
Required For each Case, calculate Mr. Oakley ’s Net Income For Tax Purposes (Division B

Chapter 1 Supplementary Self Study (SSS) Solutions Volume 1 Page 13
SSS Solution One - 1
Chapter 1 Supplementary Self Study (SSS) Solutions

Given the subject matter of this question, there are many answers that would satisfy the
requirements of the problem. Those listed below should only be considered as examples of
possible solutions.
A. A big advantage here would be the likelihood that Canadian tax revenues would increase.
In terms of qualitative characteristics, two possibilities would be:
• More neutrality, as businesses would no longer make location decisions based on the
tax status of the shipping point.
• Complexity would be added in terms of finding a mechanism to enforce collections.
B. A possible advantage would be economic development in that the deductibility of interest

could encourage real estate purchases. In terms of qualitative characteristics, two possi-
bilities would be:
• Vertical equity in the sense that high income taxpayers benefit most from the
non-taxation of capital gains on the disposition of a principal residence.
• Balance between sectors would be improved as the tax relief on interest payments
would reduce taxes on individuals.
C. A major advantage would likely be increased revenues as the ability to use multiple corpo-
rate structures for tax planning purposes would be reduced. In terms of qualitative
characteristics, two possibilities would be:
• More neutrality, as it would remove the incentive to make investment decisions on the
basis of multiple corporate structures.
• There would be greater ease of compliance as only one tax return would be required.
D. The major advantage here would likely be greater ease of compliance for business. In
terms of qualitative characteristics, two possibilities would be:
• Simplicity and ease of compliance would be improved.
• Certainty would be improved, in that taxpayers would be more aware of the amounts
to be paid, without having to do the additional calculations required for input tax
credits.


Case A
Martin Judge would be considered resident in Canada for the part year beginning October 1,
2018 and would be taxed on his worldwide income for this period. This conclusion is based
on the assumption that he did not become a resident of Canada until he returned to Canada
and began working at his new position.
Case B
Ms. Gloria Salinas would not be considered a Canadian resident. As a result, none of her
income would be subject to Canadian taxes. ITA 250(1)(c)(i) indicates that an ambassador of
Canada will be deemed to be a Canadian resident only if she was resident in Canada immedi-
ately prior to her appointment to the position.
Case C
Roberto Salinas would not be considered a Canadian resident. As a result, none of his income
(if any) would be subject to Canadian taxes. While ITA 250(1)(f) indicates that a child of an
ambassador who is a deemed resident under ITA 250(1)(c)(i) is also a deemed resident,
Roberto’s mother is not such a deemed resident. Therefore, Roberto would not be considered
a Canadian resident.
Case D
Kole Ltd. would be considered resident in Canada based on ITA 250(4)(c), which indicates
that a corporation is resident in Canada if it was incorporated in Canada prior to April 27,
1965 and carried on business, or was resident in Canada, in any year ending after April 26,
1965. Based on the location of its mind and management, it would also be considered a resi-
dent of the U.S. Given this dual residency, the tie breaker rule in the Canada/U.S. tax treaty
would resolve the situation by making the Company a resident of its country of incorporation.
This would result in Kole Ltd. being considered a resident of Canada, the country of
incorporation.
Case E
Forman Inc. would be considered resident in Canada because of the location of its mind and
management. However, as Forman was incorporated in the U.S., it would also be considered
a resident of that country. Given this dual residency, the tie breaker rule in the Canada/U.S.
tax treaty would resolve the situation by making the Company a resident of its country of
incorporation. This would result in Forman being considered a resident of the U.S., and a
non-resident of Canada.


Case A
As Brad was in Canada for more than 183 days in 2018, he is a deemed resident through the
application of the sojourner rule, and therefore a dual resident. In applying the tie-breaker
rules, the first factor that is considered is in which country the individual has a permanent
home.
With respect to this criterion, Brad would not be considered to have a permanent home in
either country. He gave up his lease on the Seattle property and, given that he only planned to
stay for a short period of time, the Vancouver apartment would not be considered a perma-
nent home. In the absence of a permanent home in either country, the next factor to consider
would be the location of Brad’s “centre of vital interests”. This would appear to be the U.S.
and, given this, the tie-breaker rules would make Brad a resident of the U.S. and a non-resi-
dent of Canada.
Sarah is a resident of Canada until September 15, 2018. Assuming she severs all residential
ties with Canada on her departure, she would become a non-resident of Canada on that date.
Case B
Because Helen is temporarily in Canada for more than 183 days in 2018, she would be consid-
ered a deemed resident of Canada under the sojourner rules. As this makes her a dual resident
of the U.S. and Canada, the tie-breaker rules would come into play.
Since it appears that Helen has a permanent home in Burlington, the tie-breaker rules would
indicate that she is a resident of the United States. The hotels would not be considered to be a
permanent home given that Helen never intended to stay for a long period of time.


Case A
The Case A solution would be calculated as follows:
Income Under ITA 3(a):
Employment Income $46,700
Interest Income 3,500 $50,200
Income Under ITA 3(b):
Allowable Capital Losses ( 10,540) 2,930
Balance From ITA 3(a) And (b) $53,130
Spousal Support Payments [(12)($500)] ( 6,000)
Balance From ITA 3(c) $47,130
Deductions Under ITA 3(d):
Net Rental Loss ( 22,250)
Business Loss ( 37,260)
Net Income For Tax Purposes (Division B Income) Nil
In this Case, Christophe has rental and business loss carry overs of $12,380 ($47,130 -
$22,250 - $37,260). The provincial lottery winnings would not be included in Christophe’s
Net Income For Tax Purposes as they are not subject to tax.
Case B
The Case B solution would be calculated as follows:
Interest Income 4,560 $79,960
Allowable Capital Losses ( 9,460) Nil
Child Care Costs ( 4,520)
RRSP Contributions ( 6,570)
Spousal Support Payments ( 3,600)
Deduction Under ITA 3(d):
Net Income For Tax Purposes (Division B Income) $53,070
In this Case, Christophe has an allowable capital loss carry over of $735 ($8,725 - $9,460).


Case A
The Case A solution would be calculated as follows:
Rental Income 12,000 $ 95,000
Allowable Capital Losses ( 35,000) 46,000
Subdivision e Deductions ( 15,000)
Net Income For Tax Purposes (Division B Income) $104,000
In this Case, Mr. Oakley has no loss carry overs at the end of the year.
Case B
The Case B solution would be calculated as follows:
Rental Income 16,000 $108,000
Balance From ITA 3(c) $ 96,000
Net Income For Tax Purposes (Division B Income) $ 74,000
In this Case, Mr. Oakley has a carry over of $14,000 ($32,000 - $18,000) in unused allowable
capital losses.

Case C
The Case C solution would be calculated as follows:
Business Income 21,000 $67,000
Balance From ITA 3(a) and (b) $67,000
Rental Loss ( 42,000)
Net Income For Tax Purposes (Division B Income) $ 9,000
In this Case, Mr. Oakley would have an allowable capital loss carry over in the amount of
$31,000 ($53,000 - $22,000).
Case D
The Case D solution would be calculated as follows:
Business Income 16,000 $73,000
Net Income For Tax Purposes (Division B Income) Nil
Mr. Oakley would have a carry over of unused business losses in the amount of $36,000
($92,000 - $56,000) and of unused allowable capital losses in the amount of $4,000 ($35,000
- $31,000).

Self Study Problem Two - 1

(Individual Tax Instalments)
For the three years 2016, 2017, and 2018, Mr. George Grafton provides the following infor-
mation on his combined federal and provincial taxes payable, along with information on
withholdings by his employer:
Year Taxes Payable Taxes Withheld
2016 $31,500 $29,800
2017 14,600 6,200
2018 (Estimated) 27,400 24,300
In January, 2018, you are asked to provide tax advice to Mr. Grafton. He has asked you
whether it will be necessary for him to pay instalments in 2018 and, if so, what the minimum
amounts that should be paid are, along with the dates on which these amounts are due.
Required: Provide the information requested by Mr. Grafton. Be sure to show all required
calculations.


(Corporate Tax Instalments)
For the taxation year ending December 31, 2016, a corporation's combined federal and
provincial Tax Payable is $103,680. The corresponding figure for 2017 is $122,220. For the
year ending December 31, 2018, it is estimated that combined federal and provincial Tax
Payable will be $113,220.
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 taxes payable for the year ending December 31, 2017 were
$110,520, instead of the $122,220 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
taxes payable for the year ending December 31, 2017 were $110,520, instead
of the $122,220 given in the problem.
Required: For each of the preceding independent Cases, provide the following
information:
1. Indicate whether instalments are required during 2018. 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 during 2018. If instalments must be paid, indicate the dates on which they are
due.


(Individual And Corporate Tax Instalments)
For the three years ending December 31, 2018, the taxpayer’s combined federal and provin-
cial tax payable was as follows:
Year Ending December 31 Taxes Payable

2016 $72,300
2017 89,400
2018 (Estimated) 78,300
Case One The taxpayer is an individual whose employer withholds combined federal and
provincial taxes of $73,700 in 2016, $83,200 in 2017, and $75,000 in 2018.
Case Two The taxpayer is an individual whose employer withholds combined federal and
Case Three The taxpayer is a small CCPC with a taxation year that ends on December 31.
Case Four The taxpayer is a publicly traded corporation with a taxation year that ends on
December 31. Assume that its combined federal and provincial taxes payable
for the year ending December 31, 2017 were $74,500, instead of the $89,400
given in the problem.
information:
1. Indicate whether instalments are required during 2018. Provide a brief explanation of
your conclusion. This explanation should be provided even if the amount of the required
instalments is nil.
2. If instalments are required, calculate the amount of instalments that would be required
under each of the acceptable methods available.
3. If instalments are required, indicate which of the available methods would best serve to
minimize instalment payments during 2018. If instalments must be paid, indicate the
date on which they are due.


For each of the following independent Cases, the taxpayer’s combined federal and provincial
taxes payable amounted to $18,000 for the year ending December 31, 2016, while for the
year ending December 31, 2017, the amount payable was $14,400. At the beginning of 2018,
it is estimated that federal and provincial taxes payable for the year ending December 31,
2018 will be $13,500. The actual federal and provincial taxes payable for 2018, calculated in
March, 2019, is $16,000.
A. The taxpayer is an individual whose only income is rental income.
B. The taxpayer is an individual whose employer withholds combined federal and
C. The taxpayer is a small CCPC with a December 31 year end.
D. The taxpayer is a publicly traded corporation with a December 31 year end. Assume
that its combined federal and provincial taxes payable for the year ending December
31, 2018 are estimated to be $16,000, instead of the $13,500 given in the problem.
Required: For each of the Cases, state whether instalments are required for the 2018 taxa-
tion year, even if one of the methods results in required instalments of nil. Explain your
conclusion. If instalments are required, indicate:
• the best alternative for calculating the instalments,
• the amount of the instalments under that alternative showing all calculations, even if the
optimum solution is obvious,
• the dates on which the payments will be due, and
• any consequences of the 2018 estimated taxes being lower than the actual taxes payable.

(Canadian Taxable Entities)
List the three types of entities that are subject to federal income taxation in Canada and, for
each, state:
• how their taxation year is established;
• the filing deadlines for their respective income tax returns;
• how frequently income tax instalments must be made; and
• the dates on which the instalment payments must be made.


(Assessment Disputes)
Mr. Norman Coffee has been one of your major clients for years. He is extremely wealthy and
has paid his very sizable tax payable (and your fees) for decades without complaint.
On August 15th of the current year, Mr. Coffee receives a Notice of Reassessment indicating
that he owes $5,000 of additional taxes, plus interest, for the preceding taxation year. Since
you filed the tax return in dispute, Mr. Coffee expects you to deal with the matter quickly.
Required: Indicate the procedures that may be used in dealing with this dispute between
the CRA and Mr. Coffee.

(Tax Preparer’s Penalty)
For each of the following independent cases, indicate whether you believe a penalty would be
assessed against the tax return preparer under ITA 163.2. Explain your conclusion.
A. Joan Bridge, a recently qualified CPA, has several clients that have been reassessed with
respect to deductions related to their investment in the Large Partners tax shelter. In each
case, the CRA has denied loss deductions, claiming that they are based on an overvalu-
ation of the organization's assets. One of these clients has taken the case to the Tax Court
of Canada which confirmed the CRA's reassessment. No further appeal was undertaken.
Joan has a new client who also has an interest in this same Large Partners tax shelter. Joan
prepares this new client's return claiming the same deductions that were disallowed for
her other clients.
B. Jack Hodge, a CPA, is paid to EFILE the tax return of Barbra Hicks, a very close friend of his
mother. Barbra provides him with a T4 slip indicating that she has $31,000 in employ-
ment income. She also indicates that she made a $22,000 contribution to a registered
charity, but forgot to bring the receipt to the meeting with Jack. In actual fact, she did not
make the donation. Jack files the tax return without questioning her claim after his mother
assures him that Barbra is completely trustworthy.
C. Marian Flexor, a CPA, is asked by Jason March to prepare and file his tax return. Jason
provides a financial statement for his business activities which shows a significant profit.
Included in the statement provided to Marian is a large amount of travel costs, all of which
are supported by receipts. After the return is filed, the CRA audits Jason's business activi-
ties and finds that more than one-half of the travel costs were personal, rather than
business related.

SSS Problem Two - 2

SSS Problem Two - 1

In January, 2018, you are asked to provide tax advice to Ms. Leslie Garond. She has provided
you with the following information about her combined federal and provincial taxes payable
and the income taxes withheld by her employer for the 2016 and 2017 taxation years:

2016 $22,000 $9,500
2017 18,000 9,700
For 2018, she estimates that her combined federal and provincial taxes payable will be
$14,000 and that her employer will withhold a total of $9,850 in income taxes.
She has asked you whether it will be necessary for her to pay instalments in 2018 and, if so,
what the minimum amounts that should be paid are, and when they are due.
Required: Advise Ms. Garond as to whether or not she is required to make instalment
payments for 2018. If instalments are required, calculate the alternative amounts that could
be paid. Indicate which alternative would be best and the dates on which the payments
should be made.
SSS Problem Two - 2

In January, 2018, you are asked to provide tax advice to Mr. Lester Gore. For the three years
2016, 2017, and 2018, he provides the following information on his combined federal and
provincial taxes payable, along with information on withholdings by his employer:

2016 $15,000 $11,500
2017 10,800 11,750
2018 (Estimated) 17,000 13,000
He has asked you whether it will be necessary for him to pay instalments in 2018 and, if so,
what is the minimum he has to pay and when.
Required: Provide the information requested by Mr. Gore. Your answer should include a
conclusion on whether or not instalments are required. If instalments are required, indicate
the alternative amounts that could be remitted, the best alternative to use, and the dates on
which the instalments should be paid.

SSS Problem Two - 4
SSS Problem Two - 3

For the year ending December 31, 2016, the taxpayer’s combined federal and provincial
taxes payable amounted to $93,000, while for the year ending December 31, 2017, the
amount payable was $108,000. It is estimated that federal and provincial taxes payable for
the year ending December 31, 2018 will be $82,500.
Case A The taxpayer is an individual whose employer withholds combined federal

and provincial taxes of $86,700 in 2016, $109,500 in 2017, and $79,200 in 2018.
Case B The taxpayer is an individual whose employer withholds combined federal

and provincial taxes of $91,500 in 2016, $98,700 in 2017, and $78,300 in 2018.
Case C The taxpayer is a small CCPC with a December 31 year end.
Case D The taxpayer is a publicly traded corporation with a December 31 year end.
Assume that its combined federal and provincial taxes payable for the year ending
December 31, 2016 are estimated to be $78,100, instead of the $93,000 given in the
problem.
information:
1. Indicate whether instalments are required during the year ending December 31, 2018,
including a brief explanation of your conclusion. This explanation should be provided
even if the amount of the required instalments is nil.
2. Calculate the amount of instalments that would be required under each of the acceptable
methods available.
3. Indicate which of the acceptable methods would best serve to minimize instalment
payments during 2018. If instalments must be paid, indicate the date on which they are
due.
SSS Problem Two - 4

(Instalments, Interest And Penalties For Corporations)
The fiscal year of the Sloan Company, a public company, ends on October 31. During the year
ending October 31, 2016, its federal taxes payable amounted to $168,000, while for the year
ending October 31, 2017, the federal taxes payable were $153,000. It is estimated that
federal taxes payable for the year ending October 31, 2018 will be $144,000.
Required:
A. Calculate the instalment payments that are required for the year ending October 31, 2018
under each of the alternative methods available. Indicate which of the alternatives would
be preferable.
B. If the Company did not make any instalment payments towards its 2018 taxes payable,
and did not file its corporate tax return or pay its taxes payable on time, indicate how the
interest and penalty amounts assessed against it would be determined (a detailed calcula-
tion is not required).

SSS Problem Two - 5
SSS Problem Two - 5

(Tax Preparer’s Penalty)
For each of the following independent cases, indicate whether you believe a penalty would be
assessed against the tax return preparer under ITA 163.2. Explain your conclusion.
A. Accountant X is asked by Client A to prepare a tax return including a business financial
statement to be used in the return. In response to a request by Accountant X for business
related documents, Client A supplies information to Accountant X, which includes a travel
expense receipt. Accountant X relies on this information provided by Client A and
prepares the business statement that is filed with the return. The CRA conducts a compli-
ance audit and determines that Client A's travel expense was a non-deductible personal
expense.
B. Accountant X has several clients that have been reassessed in respect of a tax shelter.
Accountant X knows that the CRA is challenging the tax effects claimed in respect of the
tax shelter on the basis that the shelter is not a business, is based on a significant
overvaluation of the related property and is technically deficient in its structure. The Tax
Court of Canada, in a test case (general procedures), denies deductions claimed in respect
of the tax shelter in a previous year by Client B (a client of Accountant X). Client B's appeal
is dismissed. The case is not appealed and Accountant X is aware of the Court's decision.
Accountant X prepares and files a tax return on behalf of Client C that includes a claim in
respect of the same tax shelter that the Tax Court denied deductions for.
C. Taxpayer Z approaches Tax-preparer X to prepare and EFILE Z's tax return. Taxpayer Z
provides X with a T4 slip indicating that Z has $32,000 of employment income. Taxpayer
Z advises X that he made a charitable donation of $24,000 but forgot the receipt at home.
Z asks that X prepare and EFILE the tax return. In fact, Z never donated anything to a
charity. X prepares Z’s tax return without obtaining the receipt.

SSS Solution Two - 1

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 taxes payable, less amounts withheld under
ITA 153. Ms. Garond’s net tax owing figures are as follows:
2016 = $12,500 ($22,000 - $9,500)

2017 = $ 8,300 ($18,000 - $9,700)
2018 = $ 4,150 ($14,000 - $9,850) Estimate
As Ms. Garond’s net tax owing in all three of the years exceeds $3,000, she is required to make
instalment payments.
Alternative Amounts
There are three possible alternatives for remitting instalments. These are as follows:
• Quarterly instalments of $1,037.50 ($4,150 ÷ 4) based on the current year estimate.
• Quarterly instalments of $2,075.00 ($8,300 ÷ 4) based on the first preceding year.
• Two quarterly instalments of $3,125.00 ($12,500 ÷ 4) based on the second preceding
year, followed by two instalments of $1,025.00 {[$8,300 - (2)($3,125)] ÷ 2}.
Best Alternative
The best alternative would be four instalments of $1,037.50.
Payment Dates
The quarterly payments would be due on March 15, June 15, September 15, and December
15.


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 taxes payable, less amounts withheld. Mr.
Gore’s estimated net tax owing for the three years under consideration is as follows:
2016 = $3,500 ($15,000 - $11,500)
2017 = Nil ($10,800 - $11,750)
2018 = $4,000 ($17,000 - $13,000) Estimate
As Mr. Gore’s net tax owing in 2018 (the current year) and his net tax owing in 2016 (one of the
two preceding years) is greater than $3,000, he is required to make instalment payments.
Alternative Amounts
There are three possible alternatives for remitting instalments. These are as follows:
• Quarterly instalments of $875 ($3,500 ÷ 4) based on the current year estimate.
• Quarterly instalments of Nil based on the first preceding year.
• Two quarterly instalments of $875 ($3,500 ÷ 4) based on the second preceding year. No
further instalments will be required.
Best Alternative
The best alternative would be four instalments of Nil, i.e. no instalments being paid.
Payment Dates
If payments were required, they would be due on March 15, June 15, September 15, and
December 15. However, since the prior year's net tax owing was nil, no instalments are
required.


Case A
1. The individual’s net tax owing for the relevant three years is as follows:
2016 $6,300 ($93,000 - $86,700)
2017 Nil (Withholdings Exceed Tax Payable)
2018 $3,300 ($82,500 - $79,200)
As the net tax owing exceeds $3,000 in the current year and one of the two preceding
years, instalments are required.
2. The three alternatives would be:
• Quarterly instalments of $825 ($3,300 ÷ 4) based on the current year estimate.
• Quarterly instalments of Nil based on the first preceding year.
• Two quarterly instalments of $1,575 ($6,300 ÷ 4) based on the second preceding
year. No further instalments will be required.
3. The best alternative would be quarterly instalments of nil, based on the first preceding
year. There was no net tax owing for that year.
Case B
1. The individual’s net tax owing for the relevant three years is as follows:
2016 $1,500 ($93,000 - $91,500)
2017 $9,300 ($108,000 - $98,700)
2018 $4,200 ($82,500 - $78,300)
As the net tax owing exceeds $3,000 in the current year and one of the two preceding
years, instalments are required.
2. The three alternatives would be:
• Quarterly instalments of $1,050 ($4,200 ÷ 4) based on the current year estimate.
• Quarterly instalments of $2,325 ($9,300 ÷ 4) based on the first preceding year.
• Two quarterly instalments of $375 ($1,500 ÷ 4) based on the second preceding
year, followed by two instalments of $4,275 {[$9,300 - (2)($375)] ÷ 2}.
3. The best alternative would be quarterly instalments of $1,050, for a total of $4,200. This
is much lower than the total of $9,300 required under the other two alternatives.
The instalments are due on March 15, June, 15, September 15, and December 15.
Case C
1. As the corporation’s tax payable for both the current and the preceding year exceeds
$3,000, instalments are required. As the corporation is a small CCPC, quarterly instal-
ments can be used.
2. The three acceptable alternatives would be as follows:
• Quarterly instalments of $20,625 ($82,500 ÷ 4) based on the current year estimate.
• Quarterly instalments of $27,000 ($108,000 ÷ 4) based on the first preceding year.
• One quarterly instalment of $23,250 ($93,000 ÷ 4) based on the second preceding
year, followed by three instalments of $28,250 [($108,000 - $23,250) ÷ 3], a total of
$108,000.

3. The best alternative would be quarterly instalments of $20,625 based on the current year
Tax Payable estimate. The total would be $82,500, significantly less than the $108,000
total under the other two methods.
The instalments are due on March 31, June 30, September 30, and December 31.
Case D
1. As the corporation’s tax payable for both the current and the preceding year exceeds
$3,000, instalments are required. As the corporation is not a small CCPC, monthly instal-
ments are required.
2. The three acceptable alternatives would be as follows:
• Monthly instalments of $6,875 ($82,500 ÷ 12 based on the current year estimate.
• Monthly instalments of $9,000 ($108,000 ÷ 12) based on the first preceding year.
• Two monthly instalment of $6,508.33 ($78,100 ÷ 12) based on the second
preceding year, followed by 10 monthly instalments of $9,498.33 {[$108,000 -
(2)($6,508.33) ÷ 10]}, a total of $108,000.
3. The best alternative would be monthly instalments of $6,875, based on the current year
Tax Payable estimate. The total would be $82,500, significantly less than the $108,000
total under the other two methods.
The instalments would be due on the last day of each month, beginning in January.


Part A
Under ITA 157(1), the Sloan Company would have three alternatives with respect to the calcu-
lation 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 taxes
payable for the current year. In this case the resulting instalments would be $12,000
per month ($144,000 ÷ 12).
Preceding Year Base The instalment payments could be 1/12th of the taxes payable
in the immediately preceding taxation year. The resulting instalments would be
$12,750 ($153,000 ÷ 12).
Preceding And Second Preceding Years The third alternative would be to base the
first two instalments on 1/12th of the taxes payable in the second preceding year and
the remaining 10 instalments on 1/10th of the taxes payable in the preceding year less
the total amount paid in the first two instalments.
In this case, the first two instalments would be $14,000 ($168,000 ÷ 12) and the
remaining 10 instalments would be $12,500 [($153,000 - $28,000) ÷ 10]. The total
instalments under this approach would be $153,000.
As the Company has been experiencing a decline in its taxes payable over this three year
period, the payments based on the current year’s estimated taxes payable would be the most
favorable in terms of minimizing cash outflows.
Part B
If the Company failed to make instalment payments towards the 2018 taxes payable, it would
be liable for interest from the date each instalment should have been paid to the balance due
date, December 31, 2018.
Assuming the actual 2018 taxes payable are $144,000, it would be the least of the amounts
described in ITA 157(1), and interest would be calculated based on this instalment alternative.
The rate charged would be the one prescribed in ITR 4301 for amounts owed to the Minister,
the regular rate plus 4 percentage points.
There is a penalty on large amounts of late or deficient instalments. This penalty is specified in
ITA 163.1 and is equal to 50 percent of the amount by which the interest owing on the late or
deficient instalments exceeds the greater of $1,000 and 25 percent of the interest that would
be owing if no instalments were made. While detailed calculations are not required, we
would note that this penalty would be applicable in this case.
Interest on the entire balance of $144,000 of taxes payable would be charged beginning on
the balance due date, December 31, 2018. The rate charged would be the one prescribed in
ITR 4301 for amounts owed to the Minister, the regular rate plus 4 percentage points.
There is also a penalty for late filing . If no return is filed by the filing date, the penalty amounts
to 5 percent of the tax that was unpaid at the filing date, plus 1 percent per complete month of
the unpaid tax for a maximum period of 12 months. This penalty is in addition to any interest
charged due to late payment of instalments or balance due. In addition, interest would also be
charged on any penalties until such time as the return is filed or the instalments (balance due)
paid.
The late file penalty could be doubled to 10 percent, plus 2 percent per month for a maximum
of 20 months for a second offence within a three year period.


Part A
Accountant X is not liable for participating in an understatement of Client A's taxes payable
because Accountant X did not know the expense receipt was personal in nature, and would
not be reasonably expected to know, but for circumstances amounting to culpable conduct,
that this was the case. This is because X relied in good faith on the information provided by A.
Part B
Based on these facts, Accountant X would be liable for a third party penalty. However, if
Accountant X had determined that there was a reasonable basis upon which the Tax Court
decision could be overturned by a higher court, the penalty would not apply.
Part C
Based on these facts, if X were to prepare and EFILE Z's return without obtaining the charitable
donation receipt, X would be liable for a third party penalty. Given that the size of the dona-
tion is so disproportionate to Z's apparent income as to defy credibility, to EFILE the return
without verifying the amount of the receipt would show an indifference as to whether the Act
is complied with or would show a wilful, reckless, or wanton disregard of the law.

Self Study Problem Three - 1

(Bonus Arrangements)
Empire Inc. has an October 31 year end. On October 31, 2018, the Company accrues a bonus
of $250,000, payable to Joan Betz, the president of the Company.
Required: For each of the following cases, indicate the taxation year in which the Company
could deduct the bonus, as well as the taxation year in which Ms. Betz would have to include it
in her taxable income.
Case A The bonus is paid on November 1, 2018.
Case B The bonus is paid on January 1, 2019.
Case C The bonus is paid on June 30, 2019.
Case D The bonus is paid on January 1, 2022.


(Employee Vs. Self-Employed)
Farnham Ltd. is interested in acquiring the services of a highly qualified engineering profes-
sional. This individual has agreed to become an employee at a salary of $250,000 per year.
For employees, the cost of providing benefits (pension plan and extended health care) is about
8 percent of gross wages. In addition to CPP and EI, the province levies a 2 percent payroll tax
to provide for health care. The tax applies to all wages and salaries with no upper limit.
This individual’s work is such that a contract could be arranged that would make him an inde-
pendent contractor. However, because he likes the security and benefits associated with
being an employee, the contract would have to provide income of $280,000 in order for him
to find it acceptable.
Required Advise the company as to the preferable alternative.


(Taxable Automobile Benefits)
Ms. Tamira Vines is a salesperson for Compudata Ltd., a Regina based software company. As
her work requires her to travel extensively throughout southern and central Saskatchewan,
the Company provides her with an automobile. Saskatchewan does not participate in the HST
program and has a provincial sales tax which is assessed at a rate of 5 percent.
From January 1, 2018 through May 31, 2018, the Company provided her with an Acura TLX.
This car was purchased by the Company on January 1, 2018 at a cost of $39,000, plus $1,950
in provincial sales tax and $1,950 in GST. During the period January 1, 2018 through May 31,
2018, the car was driven 38,800 kilometers for employment related purposes and 3,400 kilo-
meters for personal use. The Company paid all operating costs during the period, an amount
of $3,656, including applicable provincial sales tax and GST.
On June 1, 2018, following a late evening sales conference at the Shangri La Hotel in Moose
Jaw, Ms. Vines was involved in an accident in which the Acura was destroyed. Ms. Vines was
hospitalized and was not able to return to work until July 1, 2018. Compudata’s insurance
company paid $27,500 to the Company for the loss of the car.
When she returned to work on July 1, 2018, the Company provided Ms. Vines with a Ford
Taurus. The Company leased this vehicle at a monthly cost of $699 per month, including
applicable provincial sales tax and GST. This monthly payment also includes a $100 per
month charge for insurance.
For the period July 1, 2018 through December 31, 2018, operating costs, other than insur-
ance, totaled $3,456, including applicable provincial sales tax and GST. These were paid for
by the Company. During this period, Ms. Vines drove the car 15,600 kilometers for employ-
ment related purposes and 14,600 kilometers for personal use.
Ms. Vines paid to the Company $0.10 per kilometer for the personal use of the cars owned or
leased by the Company for the year.
Required: Calculate the minimum taxable car benefit that will be included in Ms. Vines’
employment income for the year ending December 31, 2018.


During the current year, the Carstair Manufacturing Company provides automobiles for four
of its senior executives, with the value of the cars being in proportion to the salaries which they
receive. While each of the individuals uses their car for employment related travel, they also
use them for personal matters. The portion of personal use varies considerably among the four
individuals. When the car is not being used by the employee, the Company requires that it be
returned to the corporate premises.
The details related to each of these cars, including the amount of personal and employment
related travel recorded by the executives, are as follows:
Mr. Sam Stern Mr. Stern is the president of the Company and is provided with a
Mercedes which has been purchased by the Company at a cost of $78,000. The car
was new last year and, during the current year, it was driven a total of 38,000 kilome-
ters. Of this total, only 6,000 kilometers were for employment related purposes,
while the remaining 32,000 were for personal travel. Operating costs totaled $.50 per
kilometer and, because Mr. Stern made an extended trip outside of North America,
the car was used by Mr. Stern for 8 months during the current year. During the period
when he was outside North America, the Company required Mr. Stern to return the
car to the Company garage.
Ms. Sarah Blue Ms. Blue is the vice president in charge of marketing and has been
provided with a Corvette. The Company leases this vehicle at a cost of $900 per
month. During the current year, the car was driven a total of 60,000 kilometers, with
55,000 of these kilometers being for employment related purposes. The car was used
by Ms. Blue throughout the current year, and total annual operating costs amount to
$18,000.
Mr. John Stack Mr. Stack is the vice president in charge of finance and he has been
provided with an Acura that was purchased by the Company in the preceding year at a
cost of $48,000. During the current year, Mr. Stack drove the car 42,000 kilometers
for employment related purposes and 10,000 kilometers for personal travel. Oper-
ating costs for the year were $20,800, and the car was used by Mr. Stack throughout
the current year. In order to reduce his taxable benefit, Mr. Stack made a payment of
$7,000 to the Company for the use of this car.
Mr. Alex Decker Mr. Decker, the vice president in charge of industrial relations,
chose to drive a Lexus. This car was leased by the Company at a cost of $500 per
month. The lease payment was significantly reduced by the fact that the Company
made a refundable deposit of $10,000 to the leasing Company at the inception of the
lease. During the current year, Mr. Decker drove the car 90,000 kilometers for
employment related purposes and 8,500 kilometers for personal use. The operating
costs were $0.35 per kilometer and, because of an extended illness, he was only able
to use the car for the first 10 months of the year. During the period when he was ill, the
Company required Mr. Decker to return the car to the Company garage.
Required: Calculate the minimum amount of the taxable benefit for the current year that
will accrue to each of these executives as the result of having the cars supplied by the
Company. In making these calculations, ignore GST/HST/PST considerations. From the point
of view of tax planning for management compensation, provide any suggestions for the
Carstair Manufacturing Company with respect to these cars.


(Employer Provided Vs. Employee Owned Car)
John Rush is a key employee of Megan Ltd. (ML), a Canadian public company. He is not
required to use an automobile in carrying out his employment duties.
In 2016 and 2017, ML has provided John with a car with ML paying all of the operating costs of
the car. John uses the car exclusively for personal travel.
On January 2, 2018, ML has indicated to John that, as an alternative to continuing to provide
the car for him, they will sell the car to him at its current fair market value of $20,000. If he
chooses to purchase the car, ML will no longer pay the operating costs.
John expects that, whether he chooses to purchase the car or not, he will use the car for two
more years, 2018 and 2019. If he purchases the car, the estimated sales price at the end of
these two years would be $12,000. He expects to drive the car about 40,000 kilometers in
each of the two years.
Assume that operating costs will be $0.20 per kilometer and the prescribed operating cost
benefit will be $0.26 per kilometre throughout both years.
John's combined federal/provincial marginal tax rate is 48 percent.
Required: On the basis of non-discounted cash flows, advise John as to whether he should
purchase the car assuming:
A. ML purchased the car for $35,000.
B. ML purchased the car for $70,000.
Ignore GST/HST considerations.


(Loans To Employees)
Mr. Thomas Malone is employed by Technocratic Ltd. in a management position. Because of
an outstanding performance in his division of the Company, he is about to receive a promotion
accompanied by a large increase in compensation. He is discussing various possible ways in
which his compensation might be increased without incurring the same amount of taxation as
would be assessed on an increase in his salary. He has suggested that it might be advantageous
for the Company to provide him with a five year interest free loan in the amount of $200,000
as part of any increase in compensation.
The funds will either be used to purchase a cottage in which case any interest on related loans
will not be deductible to Mr. Malone, or used to purchase investments in which case any
interest on related loans will be deductible to Mr. Malone.
Other relevant information is as follows:
• Given Mr. Malone’s present salary, any additional income will be taxed at 51 percent.
• Technocratic Ltd. is able to invest funds at a before tax rate of 18 percent. It is subject to
taxation at a 25 percent rate.
• Mr. Malone can acquire a similar term, $200,000 loan at an annual rate of 5 percent.
• Assume that the relevant Regulation 4301 rate for imputing interest on various tax related
balances is 2 percent.
Required: Evaluate Mr. Malone’s suggestion of providing him with an interest free loan in
lieu of salary from the point of view of the cost to the Company. How will the deductibility of
the interest affect your conclusion?


(Employee Stock Options)
During 2016, Ms. Sara Wu’s employer, Imports Ltd., granted her stock options that allowed
her to acquire 12,000 shares of the Company ’s common stock at a price of $22 per share. At
this time, the shares have a fair market value of $20 per share.
On June, 1, 2017, Ms. Wu exercises all of these options. At this time, Imports Ltd. shares have
a fair market value of $31 per share.
On January 31, 2018, Ms. Wu sells the 12,000 Imports Ltd. shares at a price of $28 per share.
Required: For each of the following Cases, calculate the tax consequences of the transac-
tions that took place during 2016, 2017, and 2018 on both the Net Income For Tax Purposes
and the Taxable Income of Ms. Wu. Where relevant, identify these effects separately.
Case A Imports Ltd. is a public company.
Case B Imports Ltd. is a Canadian controlled private corporation.


Ms. Patricia Martin is employed by a Canadian public company. In 2016, she was given
options to acquire 1,500 of the company's shares at a price of $45 per share. At this time the
shares are trading at $47 per share.
During 2017, Patricia exercises all of the options. At this time, the shares are trading at $50
per share.
During 2018, Patricia sells the shares for $55 per share.
Required:
A. Indicate the tax effect of the transactions that took place during each of the years 2016,
2017, and 2018. Your answer should include the effect on both Net Income For Tax
Purposes and Taxable Income. Where relevant, identify these effects separately.
B. How would your answer change if the shares had been trading at $44 per share at the time
that the options were issued in 2016?
C. How would your answer change if Patricia's employer was a Canadian controlled private
company?


(Employment Income - No Commissions)
For the last three years, Sam Jurgens has been employed in Halifax as a loan supervisor for
Maritime Trust Inc. Maritime Trust is a large public company and, as a consequence, Mr.
Jurgens felt that he did not have the opportunity to exhibit the full range of his abilities. To
correct this situation, Sam decided to accept employment in Toronto effective July 1, 2018 as
the general manager of Bolten Financial Services, a Canadian controlled private corporation
specializing in providing financial advice to retired executives.
In April, 2018, prior to leaving Maritime Trust, Mr. Jurgens exercised options to purchase
5,000 shares of the public company ’s stock at a price of $15 per share. At the time the Mari-
time Trust options were granted, the shares were trading at the option price of $15 per share.
At the time that he exercised these options, the shares were trading at $16 per share. He is still
holding these shares on December 31, 2018.
Mr. Jurgens had an annual salary at Maritime Trust of $105,000, while in his new position in
Toronto, the salary is $90,000 per year. However, he has the option of acquiring 1,000 shares
per year of Bolten stock at a price of $20 per share. On July 1, when he was granted the option,
Bolten stock had a fair market value of $14 per share. On December 1, 2018, when the Bolten
stock has a fair market value of $22 per share, Mr. Jurgens exercises these options and acquires
1,000 shares. It is his intent to hold these shares for an indefinite period of time.
Because there is extensive travel involved in the position with Bolten Financial Services, the
Company has provided Mr. Jurgens with a $40,000 company car. Between July 1 and
December 31, 2018, Mr. Jurgens drove this car a total of 25,000 kilometers, of which 15,000
kilometers were clearly related to his work with Bolten Financial Services. The operating costs
associated with the car for this period, all of which were paid for by the Company, amount to
$5,000. Because of extensive repairs resulting from a manufacturer’s recall, the car had to be
returned to the Company for the months of October and November, 2018.
At the time of his move to Toronto, Bolten Financial Services provided Mr. Jurgens with a
$200,000 home relocation loan to purchase a personal residence near the center of town. No
interest was charged on this loan.
During the year, Mr. Jurgens earned $15,000 in interest and received $45,000 in dividends
from taxable Canadian corporations.
Assume that the relevant prescribed rate through all of 2018 is 2 percent.
Required: Compute Sam Jurgens’ minimum net employment income for the year ending
December 31, 2018.


(Employment Income - Simple)
Ms. Sarah Kline is a copy editor for a major Canadian publisher. Her gross salary for the year
ending December 31, 2018 is $73,500. For the 2018 taxation year, Ms. Kline’s employer
withheld the following amounts from her income:
Federal And Provincial Income Taxes $26,000
Registered Pension Plan Contributions 2,400
Contributions To Group Disability Plan 175
Ms. Kline’s employer made a $2,400 matching contribution to her registered pension plan
and a $200 matching contribution for the group disability insurance.
Other Information:
1. During 2018, Ms. Kline is provided with an automobile that has been leased by her
employer. The lease payments are $700 per month, an amount which includes a $50
monthly payment for insurance. The car is used by her for 11 months of the year and,
during the month of non-use, she is required to return the vehicle to her employer's
premises. During 2018, she drives it a total of 40,000 kilometers. Of this total, 37,000
kilometers were for travel required in pursuing the business of her employer, and the
remainder was for personal use. The operating costs of the car totaled $5,200 for the year
and were paid by her employer. She reimbursed her employer $.30 per kilometer for her
personal use of the automobile.
2. During 2018, Ms. Kline was hospitalized. The disability plan which provides periodic
benefits to compensate for lost employment income paid her benefits of $1,800 during
this period. Ms. Kline began making contributions to this plan in 2017 and paid $225 for
that year.
3. Ms. Kline paid dues to her professional association in the amount of $1,650 for the year.
4. Ms. Kline was given options to buy 200 shares of her employer’s publicly traded stock at a
price of $50 per share 2 years ago. At the time the options were issued, the shares were
trading at $50 per share. On June 6, 2018, Ms. Kline exercises the options. At the time of
exercise, the shares are trading at $70 per share. She is still holding the shares on
December 31, 2018.
Required: Calculate Ms. Kline’s minimum net employment income for the year ending
December 31, 2018. Ignore all GST and PST considerations.


(Employment Income With Commissions)
Ms. Sandra Firth is a commission salesperson who has been working for Hadley Enterprises, a
Canadian public corporation, for three years. During the year ending December 31, 2018,
her gross salary, not including commissions or allowances, was $72,000. Her commissions for
the year totalled $14,000. The following amounts were withheld by Hadley Enterprises from
Ms. Firth’s gross salary:
Federal and provincial income taxes $22,000
Registered pension plan contributions (Note One) 3,200
Payments for group disability insurance (Note Two) 250
Payments for personal use of company car (Note Three) 2,400
Payments for group term life insurance (Note Four) 450
Interest on home purchase loan (Note Five) 3,000
Note One Hadley Enterprises made a matching $3,200 contribution to Ms. Firth’s regis-
tered pension plan.
Note Two Ms. Firth is covered by a comprehensive disability plan which provides peri-
odic benefits during any period of disability to compensate for lost employment income.
Prior to 2018, Hadley Enterprises paid all of the $500 per year premium on this plan.
However, as of 2018, Ms. Firth is required to pay one-half of this premium, the $250
amount withheld from her gross salary. During 2018, Ms. Firth was hospitalized for the
month of March. For this period, the disability plan paid her $500 per week, for a total of
$2,000.
Note Three Hadley Enterprises provides Ms. Firth with a Lexus that was purchased in
2017 for $58,000. During 2018, she drove the car 92,000 kilometers, 7,000 of which
were personal in nature. Ms. Firth paid all of the operating costs of the car, a total of
$6,200 for the year ending December 31, 2018. However, the Company provides her
with an annual allowance of $7,200 to compensate her for these costs. While Ms. Firth
was hospitalized during the month of March (see Note Two), her employer required that
the car be returned to their premises.
Note Four Ms. Firth is covered by a group term life insurance policy that pays her bene-
ficiary $160,000 in the event of her death. The 2018 premium on the policy is $1,350,
two-thirds of which is paid by her employer.
Note Five On January 1, 2018, the Company provided Ms. Firth with a $400,000 loan
to assist with the purchase of a new residence. The loan must be repaid by December 31,
2018. All of the interest that is due on the loan for 2018 is withheld from Ms. Firth’s 2018
salary. This loan does not qualify as a home relocation loan. Assume that during all of
2018, the prescribed rate was 2 percent.
Other Information:
1. At Christmas, the Company gives all of its employees a mini iPad. Each mini iPad costs the
Company $350, including all applicable taxes. The Company deducts this amount in full
in its corporate tax return.
2. During 2017, Ms. Firth received stock options from Hadley to acquire 1,000 shares of its
common stock. The option price is $5.00 per share and, at the time the options are issued,
the shares are trading at $4.50 per share. In June, 2018, the shares have increased in value
to $7.00 per share and Ms. Firth exercises her options to acquire 1,000 shares. She is still
holding them at the end of the year and has no intention of selling them.

3. The Company provides Ms. Firth with a membership in the Mountain Tennis Club. The
cost of this membership for the year is $2,500. During the year, Ms. Firth spends $6,500
entertaining clients at this club. The Company does not reimburse her for these entertain-
ment costs.
4. Ms. Firth had travel costs related to her employment activities as follows:
Meals $1,300
Lodging 3,500
Total $4,800
Her employer provides her with a travel allowance of $300 per month ($3,600 for the
year) which is included on her T4 for the year.
Required: Calculate Ms. Firth’s minimum net employment income for the year ending
December 31, 2018. Provide reasons for omitting items that you have not included in your
calculations. Ignore any GST or PST implications.


(Employment Income With Commissions, Car CCA)
Mr. Jones is a salesman handling a line of computer software throughout Western Canada.
During 2018, he is paid a salary of $25,800 and receives sales commissions of $47,700. He
does not receive an allowance from his employer for any of his expenses. During the year, Mr.
Jones made the following employment related expenditures:
Airline Tickets $ 2,350
Office Supplies And Shipping Costs 415
Purchase Of Laptop Computer 2,075
Client Entertainment 1,750
Cost Of New Car 24,000
Operating Costs Of Car 7,200
The new car was purchased on January 5, 2018, and replaced a car which Mr. Jones had leased
for several years. During 2018, Mr. Jones drove the car a total of 50,000 kilometers, of which
35,000 kilometers were for employment related purposes. The maximum capital cost allow-
ance for the car (100 percent) is $3,600.
In addition to expenditures to earn employment income, Mr. Jones has the following addi-
tional disbursements:
Alberta Blue Cross Medical Insurance Premiums $435
Group Life Insurance Premiums 665
Mr. Jones indicates that he regularly receives discounts on his employer’s merchandise and,
during the current year, he estimates that the value of these discounts was $1,300.
One of the suppliers of his employer paid $2,450 to provide Mr. Jones with a one week vaca-
tion at a northern fishing lodge.
Required: Determine Mr. Jones’ net employment income for the 2018 taxation year.
Ignore all GST and PST implications.


(Commission Income And Work Space In Home)
Mr. Worthy is a commissioned salesman and has asked for your assistance in preparing his
income tax return for the current year. He has provided you with the following information:
Employment Income
Salary $65,000
Commissions $11,000
Telephone Charges
Monthly Charge For Residential Line $ 250
Long Distance To Clients
From Work Space In Home 400
Cellular Phone Airtime To Clients 800 $ 1,450
Office Supplies And Postage At Home Office $ 295

Cost of Tickets To Basketball Games With Clients $ 2,550
Travel Expenses
Car Operating Costs $2,700
Meals 900
Hotels 2,850 $ 6,450
Capital Cost Allowance On Car (100%) $ 2,450
Cost Of Maintaining Work Space In The Home
(Based On A Proportion Of Space Used)
House Utilities $485
House Insurance 70
House Maintenance 255
Capital Cost Allowance - House 750
Capital Cost Allowance - Office Furniture 475
Mortgage Interest 940
Property Taxes 265 $ 3,240
Interest
On Loan To Buy Office Furniture $1,700
On Loan To Buy Car 2,300 $ 4,000
Mr. Worthy ’s car was purchased, used, several years ago for $28,000. Twenty percent of the
milage on the car is for personal matters. He is required by his employer to maintain an office
in his home and is eligible to deduct work space in the home costs. Mr. Worthy has received
no reimbursement from his employer for any of the amounts listed.
Required: Ignore GST and PST implications in your solutions.

A. Calculate Mr. Worthy’s minimum net employment income for the current year.
B. Assume Mr. Worthy had only $4,000 in commission income in addition to his $65,000
salary. Calculate Mr. Worthy’s minimum net employment income for the current year.


(Comprehensive Employment Income)
Mitch Lesner graduated from the University Of Alberta in early 2018 at the age of 28. He
immediately applied for a number of jobs and accepted a position as a financial planner in the
Ottawa office of Oxford Associates Ltd. Oxford Associates Ltd. is a large Canadian controlled
private corporation (CCPC) employing more than two hundred people.
Prior to accepting employment with Oxford Associates, Mitch had lived in Red Deer, Alberta.
Once he had signed the contract with Oxford Associates, plans were made to sell the house he
owned in Red Deer. Unfortunately, the home remained unsold when he moved on March 8,
2018. It was sold in late May, 2018 for $125,000. He had purchased the home several years
before for $147,000.
He arrived in Ottawa on March 16 and moved into an apartment he had rented on a monthly
basis until he could arrange to purchase a home. Rent payments were required from April 1.
Mitch began work on April 1, 2018 and eagerly awaited the arrival of his long-time girlfriend
Janice Masters from Alberta. Shortly after her arrival in Ottawa, Mitch and Janice were
married on November 29, 2018. Mitch had purchased a house just outside of Ottawa for
$235,000 that they moved into on December 1, 2018.
Mitch’s new job requires him to meet with existing and prospective clients outside of regular
office hours and, at times, on weekends. As a result, Oxford Associates will sign form T2200
stating Mitch is required to pay for certain employment expenses without reimbursement and
use a portion of his home for work. He has set aside a small room in his rented apartment
which is used exclusively to meet with clientele. Mitch is also provided with an automobile to
use in his work.
Mitch is compensated by salary with a bonus and stock option arrangement. The bonus is
based on overall company profits. The stock option is available to all employees depending
upon level of service and overall job evaluation.
Other Information:
1. Given Mitch’s high grades at the University Of Alberta, Oxford Associates offered Mitch
$10,000 to convince him to sign a five year employment contract. After Mitch accepted,
he received the cheque in February, 2018. During the period April 1, 2018 through
December 31, 2018, Mitch earned salary of $63,700. Of these earnings, $62,550 was
paid during this period as Oxford Associates holds back one week’s pay. The Company
withheld the following amounts from his salary:
Income Taxes $11,400
CPP 2,594
858
RPP Contributions 1,200
Payment For Personal Use Of Automobile 600
2. On December 16, 2018, a bonus of $7,450 was accrued for Mitch. Mitch received
$2,000 of this bonus on December 21, 2018, with the remainder being paid on February
17, 2019.
3. A few months into the new job Mitch became quite depressed. His employer suggested he
take advantage of the company assistance program. He went to four appointments in
October and November and felt much better. Oxford Associates paid $700 for Mitch’s
counselling services.

4. Oxford Associates provides group medical coverage to all of its employees. The premiums
paid by Oxford Associates on Mitch’s behalf cost $410.
5. Oxford Associates contributed $1,200 on Mitch’s behalf to the Company’s RPP.
6. Mitch is a Certified Financial Planner and paid $785 in professional dues in 2018. Oxford
Associates’ policy is to reimburse 80 percent of such annual professional dues. Oxford
Associates reimbursed him $628 in November 2018.
7. When Mitch was married in November he received non-cash wedding gifts valued at
$850. Half of the amount was contributed by his employer and the balance from other
employees.
8. Oxford Associates discovered years ago that many existing clients frequent certain recre-
ational and sporting clubs. To encourage contacts with potential clients, employees have
their choice among five such clubs. Since Mitch enjoys squash, he chose a free member-
ship at a local squash club. The annual membership fee is $915.
9. Oxford Associates reimbursed Mitch for 80 percent of the $22,000 ($147,000 -
$125,000) loss that he experienced on the sale of his Red Deer home.
10. Mitch had $35,000 for a down-payment on his new Ottawa home. Since he had no
previous work experience, the banks were reluctant to provide him a mortgage at favour-
able terms. His employer stepped in and agreed to an interest-free housing loan of
$200,000 beginning on December 1, 2018. Mitch agreed to reduce his salary slightly with
respect to this benefit. The loan requires annual payments of $7,500 due at the end of
November beginning in 2019. The loan is required to be paid if Mitch dies, sells the home
or terminates his employment. Assume that the prescribed interest rates for such benefits
are 2 percent in each of the first two quarters of 2018 and 1 percent in the third and fourth
quarters.
11. Oxford instituted a stock option plan for its employees in 2017. The plan eligibility
requires six months of service. Employees are permitted to acquire a limited number of
option shares at 20 percent below their fair market value on either May 1 or November 1.
The company hires valuators to determine the fair market value at each of those dates.
Mitch acquires 200 shares November 1, 2018 for $12,800. Low on cash and wanting to
buy Janice a nice wedding ring, he is forced to sell 80 of the shares. He sells them on
December 16, 2018 for $8,960.
12. Oxford Associates has an arrangement with a local dealership to lease a minimum number
of new automobiles each year at favourable rates. Mitch receives his leased automobile
May 1, 2018. It has 162 kilometers on it when it is received. The odometer reads 19,414
kilometers on December 31, 2018. Mitch estimates that he drove 5,198 kilometers for
personal purposes, including drives to and from home to the office. Oxford Associates
pays monthly lease payments (including HST) of $430. The cost of gas, oil, insurance,
repairs and maintenance and other charges total $2,175 for 2018. Oxford Associates
requires each employee provided with an automobile to pay $75 each month for the
personal use of the automobile which is withheld directly from their pay.
13. Mitch prepared a separate room in his apartment to be used exclusively for a home office.
He used the office space between June 1 and November 30, 2018. A home office was not
ready in his newly purchased home until February, 2019. The apartment office space is
exactly 100 square feet. The total apartment space is 1,176 square feet. Home office
related costs are as follows:

Monthly Rent $ 960

Monthly Phone Line Charge (April to November) 41
Employment Related Long Distance Calls (June to November) 74
Total Electricity Charge (March 16 to November 30) 870
Property Insurance (March 16 to November 30) 175
Paint For Apartment 253
Office Furniture 1,344
Computer Purchase 1,739
Stationery And Office Supplies Purchased 129
14. Mitch received an allowance of $250 per month for six months to cover the costs of main-
taining an office in his home.
Required: Determine Mitch’s net employment income for the year 2018. Provide explana-
tions for all amounts including reasons for omitting items not included in your calculations.

SSS Problem Three - 2


(Bonus Arrangements)
Mr. Carl Lange is the president of Lange Enterprises Inc., a Canadian controlled private
company. The Company has a September 30 year end. On September 30, 2018, the
Company declares a bonus of $175,000, payable to Mr. Lange.
Required: For each of the following cases, indicate the taxation year in which the Company
can deduct the bonus, as well as the taxation year in which Mr. Lange will have to include it in
his taxable income.
Case A The bonus is paid on October 1, 2018.
Case B The bonus is paid on January 31, 2019.
Case C The bonus is paid on July 30, 2019.
Case D The bonus is paid on January 31, 2022.

Three employees of the Cancar Company were given the use of company cars on January 1 of
the current year. The three cars are identical. Each car was driven 16,000 kilometers during
the year and the operating costs were $2,400 for each car during the year, all of which were
paid by the company. When the car is not being used by the employee, the Company requires
that it be returned to its premises.
Required: Ignore all GST/PST/HST implications. For each of the following cars, calculate
the minimum taxable benefit to the employees for the current year ending December 31.
Car A is purchased for $30,000. It is used by Aaron Abbott for the whole year. He
drives it for personal purposes for a total of 9,000 kilometers.
Car B is leased for $635 per month. It is used by Babs Bentley for 11 months of the
year. She drives it for personal purposes for a total of 6,000 kilometers and pays
Cancar Company $500 for the use of the car.
Car C is purchased for $30,000. It is used by Carole Cantin for 10 months of the year.
She drives it for personal purposes for a total of 7,000 kilometers.


(Loans To Employees)
Eileen Lee is an extremely successful computer salesperson living and working in Hearst,
Ontario, who is unhappy with her current employer. She is discussing a compensation
package with her future employer, HER Ltd., a very profitable Canadian controlled private
corporation.
As Ms. Lee’s current and anticipated investment income place her in the 51 percent income
tax bracket, she is very interested in finding ways in which she can be compensated without
incurring the same amount of taxation as would be assessed on an equivalent amount of salary.
Ms. Lee is contemplating a major cash outlay. She plans to completely renovate a commercial
property that she owns. She had been planning to obtain a loan of $100,000 at a 5 percent
rate in order to finance the renovations. She has suggested that it might be advantageous for
the Company to provide her with an interest free loan of $100,000 as part of her compensa-
tion. Because she will be using the loan for income producing purposes, any interest on the
loan will be deductible to Ms. Lee.
HER Ltd. is able to invest funds at a before tax rate of 10 percent. It is subject to taxation at a 28
percent rate. Assume that the relevant prescribed rate is 2 percent.
Required: Evaluate, from the point of view of the cost to the Company, Ms. Lee’s suggestion
of providing her with an interest free loan in lieu of sufficient salary to carry a commercial loan
at the rate of 5 percent. Assume that the cost of the renovations will be fully deductible in the
year in which they are made.

Ms. Marian Bytech is an employee of Merlin Industries Ltd. During 2016, Ms. Bytech was
granted options to acquire 200,000 of her employer’s shares at a price of $15 per share.
On August 1, 2017, all of the options are exercised. On this date, the Merlin Industries shares
have a fair market value of $22 per share.
On November 1, 2018, Ms. Bytech sells all of her Merlin Industries shares at $28 per share.
Required: Indicate the tax effect on Ms. Bytech with respect to the granting of the options,
their exercise, and the sale of the shares under each of the following independent assump-
tions. Your answer should include the effect on both Net Income For Tax Purposes and Taxable
Income. Where relevant, identify these effects separately.
A. Merlin Industries Ltd. is a Canadian controlled private corporation. At the time the
options were granted, the Company’s shares had a fair market value of $14 per share.
B. Merlin Industries Ltd. is a Canadian controlled private corporation. At the time the
options were granted, the Company’s shares had a fair market value of $18 per share.
C. Merlin Industries Ltd. is a Canadian public company. At the time the options were
granted, the shares were trading at $15 per share.
D. Merlin Industries Ltd. is a Canadian public company. At the time the options were
granted, the shares were trading at $18 per share.


(Employment Income)
Mrs. Vera Smiles is a sales representative for a Canadian controlled private corporation that
manufactures office furniture. Her gross salary for the year ending December 31, 2018 is
$53,000 and, in addition, she earned commissions of $34,500. For the 2018 taxation year,
Mrs. Smiles’ employer withheld the following amounts from her income:
Federal And Provincial Income Taxes $22,400
EI Premiums 858
CPP Contributions 2,594
Mrs. Smiles’ employer made a $3,200 matching contribution to her registered pension plan
and a $236 matching contribution to her group disability insurance.
Other Information:
1. During 2018, Mrs. Smiles is provided with an automobile that has been leased by her
employer. The lease payments are $1,220 per month, an amount which includes a $127
per month payment for insurance. The car is used by her for ten months of the year and,
during the period of non-use, she is required to return the car to her employer's premises.
During 2018, she drives it a total of 67,000 kilometers. Of this total, 63,000 kilometers
were for travel required in pursuing the business of her employer, and the remainder was
for personal use. She reimbursed her employer $1,400 for her personal use of the
automobile.
2. During 2018, Mrs. Smiles was hospitalized for a month. The disability plan which
provides periodic benefits to compensate for lost employment income paid her benefits
of $2,650 during this period. Mrs. Smiles began making contributions to this plan in 2017
and paid $260 for that year.
3. On July 1, 2018, Mrs. Smiles received a $50,000 loan from her employer. The loan
requires annual interest payments at a rate of 1 percent and Mrs. Smiles pays the interest
for 2018 on January 18, 2019. Assume that at the time the loan was granted and for the
remainder of the year, the prescribed rate was 2 percent. The loan is still outstanding at
the end of the year.
4. Mrs. Smiles was given options to buy 200 shares of her employer’s stock at a price of $32
per share 3 years ago. At the time the options were issued, the shares had a fair market
value of $30 per share. On June 1, 2018, Mrs. Smiles exercises the options. At the time of
exercise, the shares had a fair market value of $45 per share. She does not plan to sell the
shares for at least 2 years.
5. During the year, Mrs. Smiles traveled extensively on business. She had travel costs of
$3,365 in air fares, $4,880 in travel lodging, and $2,450 in meals while on the road. She
also spent $2,720 to entertain clients. Her employer reimbursed her fully for these costs
on presentation of the receipts.
Required: Calculate Mrs. Smiles’ minimum net employment income for the year ending
December 31, 2018. Provide reasons for omitting items that you have not included in your
calculations. Ignore all GST and PST considerations.

SSS Solution Three - 1

The required information for the four Cases included in this problem is as shown in the
following table:
Deduction Inclusion
Lange Enterprises Inc. Carl Lange
Year Ending September 30 Calendar Year
Case A 2018 2018
Case B 2018 2019
Case C 2019 2019
Case D 2018 2018
In Case A, the bonus is deducted when accrued because it is paid within 180 days of Lange
Enterprises’ 2018 year end. It is taxed when received.
In Case B, the bonus is deducted when accrued because it is paid within 180 days of Lange
Enterprises’ 2018 year end. It is taxed when received.
In Case C, the bonus is not paid within 180 days of Lange Enterprises’ year end. As a conse-
quence, it cannot be deducted until the year ending September 30, 2019. However, as it is
paid within 3 years of Lange Enterprises’ 2018 year end it is not a salary deferral arrangement.
This means it does not have to be included in Mr. Lange’s Taxable Income until 2019.
In Case D, the bonus is not paid until more than 3 years after the end of the calendar year in
which Mr. Lange rendered the services. This makes it a salary deferral arrangement, resulting
in Mr. Lange having to include it in his 2018 Taxable Income. Lange Enterprises will deduct
the bonus in the fiscal year ending September 30, 2018.


With respect to Cars B and C, employment related usage was more than 50 percent of total
usage and, as a consequence, there is an available reduction in the standby charge, as well as
an alternative calculation of the operating cost benefit. For Car A, the employment related use
is less than 50 percent and, as a consequence, there is no alternative calculation of either the
standby charge or the operating cost benefit.
Car A
Standby Charge [(2%)($30,000)(12)] $7,200
Operating Cost Benefit [(9,000)($0.26)] 2,340
Total Taxable Benefit $9,540
Car B
Standby Charge [(2/3)(11)($635)(6,000/18,337*)] $1,524

Operating Cost Benefit - Lesser Of:
• [(6,000)($0.26)] = $1,560
• [(1/2)($1,524)] = $762 762
Payment For Personal Use ( 500)
*[(11)(1,667)]
Car C
Standby Charge [(2%)($30,000)(10)(7,000/16,670*)] $2,519

• [(7,000)($0.26)] = $1,820
• [(1/2)($2,519)] = $1,260 1,260
*[(10)(1,667)]


Approach
The appropriate comparison in evaluating the interest free loan arrangement would be to
determine the cost to the Company of providing the loan, and then to compare this amount
with the cost of providing an equivalent benefit in the form of straight salary. The following
analysis calculates the Company ’s lowest cost route to providing Ms. Lee with the financing
required, assuming she is not a shareholder.
Cost Of Providing For Interest Payments On Commercial Loan

Ms. Lee can borrow on a loan at a rate of interest of 5 percent. This means that the annual
interest payments on $100,000 would amount to $5,000.
Because the interest on the loan can be deducted, there would be no tax consequences associ-
ated with receiving this amount of additional salary. Given this, a $5,000 increase in salary
will be sufficient to carry the loan.
The cost of the additional salary to the company would be calculated as follows:
Salary Increase $5,000
Reduction In Corporate Taxes (At 28 Percent) ( 1,400)
Net Cost To Company - Additional Salary $3,600
Cost Of Providing Interest Free Loan

Ms. Lee would be assessed a taxable benefit on the loan of $2,000 [(2%)($100,000)] for the
first year. However, under ITA 80.5, this would be deemed interest paid. As she is using the
funds provided to produce rental income, the full amount would be deductible, resulting in
no net change in taxes.
Given this, the analysis of this alternative only requires looking at the cost of the loan to the
company:
Lost Earnings On Funds Loaned (At 10 Percent) 10,000
Corporate Taxes On Imputed Earnings (At 28 Percent) ( 2,800)
Net Cost To Company - Loan $ 7,200
Conclusion
On the basis of the preceding analysis, it can be concluded that the Company should provide
an additional $5,000 in salary rather than providing Ms. Lee with an interest free loan of
$100,000. This alternative results in a net cost to the Company which is $3,600 ($7,200 -
$3,600) lower. The major factor that pushed the outcome in this direction is the high rate of
return that HER expects on invested funds.


Case A
The required information under the assumption that Merlin Industries Ltd. is a Canadian
controlled private corporation is as follows:
• Year Of Granting - No tax effect.
• Year Of Exercise - No tax effect.
• Year Of Sale - - As the option price was greater than the fair market value of the shares at
the time the options were issued, the ITA 110(1)(d) deduction can be taken. The results
for this year would be as follows:
Fair Market Value At Exercise [(200,000)($22)] $4,400,000

Cost of Shares [(200,000)($15)] ( 3,000,000)
Employment Income $1,400,000
Taxable Capital Gain [(200,000)($28 - $22)(1/2)] 600,000
Increase In Net Income For Tax Purposes $2,000,000
Deduction Under ITA 110(1)(d) [(1/2)($1,400,000)] ( 700,000)
Increase In Taxable Income $1,300,000
Case B
As the option price at the time of the grant is less than the fair market value of the shares on that
date, no deduction is available under ITA 110(1)(d). Further, as Ms. Bytech has not held the
shares for two years, no deduction is available under ITA 110(1)(d.1). Given this, the required
information under the assumption that Merlin Industries Ltd. is a Canadian controlled private
corporation is as follows:
• Year Of Exercise - No tax effect.
• Year Of Sale - The tax effects would be as follows:
Cost of Shares [(200,000)($15)] ( 3,000,000)
Employment Income $1,400,000
Taxable Capital Gain [(200,000)($28 - $22)(1/2)] 600,000
Increase In Net Income For Tax Purposes $2,000,000
Deduction Under ITA 110(1)(d) N/A
Deduction Under ITA 110(1)(d.1) N/A
Case C
The required information under the assumption that Merlin Industries Ltd. is a Canadian
public company is as follows:
• Year Of Exercise - As the option price was greater than the fair market value of the shares at
the time the options were issued, the ITA 110(1)(d) deduction can be taken. The results
for this year would be as follows:


Cost of Shares [(200,000)($15)] ( 3,000,000)
Employment Income
= Increase In Net Income For Tax Purposes $1,400,000
Deduction Under ITA 110(1)(d) [($1,400,000)(1/2)] ( 700,000)
Increase In Taxable Income $ 700,000
• Year Of Sale - The taxable capital gain would be both the increase in Net Income For Tax
Purposes and the increase in Taxable Income for the year. The taxable capital gain
would be calculated as follows:
Proceeds Of Disposition [(200,000)($28)] $5,600,000
Adjusted Cost Base [(200,000)($22)] ( 4,400,000)
Capital Gain $1,200,000
Inclusion Rate 1/2
Taxable Capital Gain $ 600,000
Case D
As the option price at the time of the grant is less than the fair market value of the shares on that
date, no deduction is available under ITA 110(1)(d). Further, as Merlin Industries Ltd. is a
public company, no deduction could have been available under ITA 110(1)(d.1). Given this,
the required information is as follows:
• Year Of Exercise - The tax effects would be as follows:
Cost of Shares [(200,000)($15)] ( 3,000,000)
Employment Income
= Increase In Net Income For Tax Purposes $1,400,000
Deduction Under ITA 110(1)(d) N/A
• Year Of Sale - The taxable capital gain would be both the increase in Net Income For Tax
Purposes and the increase in Taxable Income for the year. The taxable capital gain
Proceeds Of Disposition [(200,000)($28)] $5,600,000
Adjusted Cost Base [(200,000)($22)] ( 4,400,000)
Inclusion Rate 1/2


Mrs. Smiles’ net employment income for the year would be calculated as follows:
Gross Salary $53,000

Commissions 34,500
Registered Pension Plan Contributions ( 3,200)
Contributions To Group Disability Plan (Note One) Nil
Disability Insurance Benefit (Note One) 2,178
Automobile Benefit (Note Two) 1,222
Loan Benefit (Note Three) 250
Stock Option Benefit (Note Four) Nil
Reimbursed Travel Costs (Note Five) Nil
Net Employment Income $87,950
Note One The contributions to the group disability plan are not deductible, but can be
applied against the $2,650 received under the plan during the year. Since the employer’s
contributions to this plan are not a taxable benefit, the $2,650 in benefits received must
be included in employment income. However, this benefit can be reduced by the $472
($260 + $212) in total contributions that she has made in 2017 and 2018.
Note Two Based on the fact that Mrs. Smiles’ employment related usage is more than 50
percent, the automobile benefit is calculated as follows:
Standby Charge [(2/3)(10)($1,220 - $127)(4,000/16,670*)] $1,748

• [(4,000)($0.26)] = $1,040
• [(1/2)($1,748)] = $874 874
Total Before Payments $2,622
Payments For Personal Use ( 1,400)
Taxable Benefit $1,222
*[(10)(1,667)]
Note Three The benefit on the low interest loan would be calculated as follows:
[($50,000)(2% - 1%)(2/4)] = $250
While most students will use the quarterly calculation, the use of actual days would result
in the following acceptable alternative:
[($50,000)(2% - 1%)(184 ÷ 365)] = $252
Note Four As a Canadian controlled private corporation is involved and she is still
holding the shares, Mrs. Smiles does not recognize an employment income inclusion in
2018.
Note Five Since all of her travel and entertainment costs were reimbursed based on
actual receipts, there is no effect on her income. Her employer will have to apply the 50
percent limit on meals and entertainment to the reimbursed costs.

Self Study Problem Four - 1

Tax Payable At Alternative Rates
Barbra and Sally Hines are common-law partners. Neither person has any tax credits other
than the personal or common-law partner credit.
This problem will consider three different Cases involving alternative levels of 2018 Taxable
Income for each individual as follows:
Case One Case Two Case Three
Barbra's Taxable Income $ 42,000 $111,000 $222,000
Sally's Taxable Income 180,000 111,000 Nil
Combined Taxable Income $222,000 $222,000 $222,000
Required: For each Case, determine the combined federal Tax Payable for Barbra and Sally
Hines for the 2018 taxation year.


(Personal Tax Credits - 5 Cases)
In each of the following independent Cases, determine the maximum amount of 2018
personal tax credits, including transfers from a spouse or dependant, that can be applied
against federal Tax Payable by the taxpayer. Ignore, where relevant, the possibility of pension
income splitting .
A calculation of Tax Payable is NOT required, only the applicable credits.
1. Leonard Wilkins has Net Income For Tax Purposes of $104,300, all of which is rental
income. His spouse has Net Income For Tax Purposes of $8,720. Their daughter is 13
years old, lives with them, and has Net Income For Tax Purposes of $3,240. Their son is 24
years old and, because of a physical disability, continues to live with them. He has no
income of his own. His disability is not severe enough to qualify for the disability tax
credit.
2. Pete Webb has Net Income For Tax Purposes of $74,200 all of which is employment
income. His employer withheld the maximum EI premium and CPP contribution. He is
married to Eva Aguilar whose Net Income For Tax Purposes is $3,920. They have three
children aged 6, 10, and 12. All of the children are in good health and none of them have
income of their own.
3. Candace Hall is 78 years old and has Net Income For Tax Purposes of $69,420. This total
is made up of OAS payments of $7,000 and pension income from her former employer.
Her husband is 62 years old and has Net Income For Tax Purposes of $5,130.
4. Gladys Crawford has Net Income For Tax Purposes of $126,470, all of which is rental
income. Her husband has Net Income For Tax Purposes of $2,600. They have three chil-
dren, ages 10, 14, and 20. All of these children are in good health and continue to live at
home. The 20 year old child has Net Income For Tax Purposes of $9,130. During the
current year, Ms. Crawford pays the following medical expenses:
Gladys $ 5,150
Her Spouse 4,240
10 Year Old Child 2,040
Total $23,490
5. Austin Schneider was divorced from his wife several years ago. He has custody of their
four children, ages 5, 8, 11, and 14. The children are all in good health. His Net Income
For Tax Purposes consists of spousal support payments totaling $62,000. Only the 14 year
old child had any income for the year. The 14 year old had Net Income For Tax Purposes
of $10,350 during the year.


(Individual Tax Payable - 5 Cases)
Ms. Wanda Sykes is 42 years old. The following five independent Cases make varying assump-
tions for the 2018 taxation year with respect to Ms. Sykes’ marital status, number of
dependants, and type of income. In all Cases, Ms. Sykes had Net Income For Tax Purposes and
Taxable Income of $78,000. In all Cases where Ms. Sykes earned employment income, her
employer withheld the maximum EI premium and CPP contribution.
Case A Ms. Sykes is a single mother. She has a son, John, who is 10 years old and
lives with her. All of Ms. Sykes’ income is from spousal support payments. During
2018, Ms. Sykes attends university for 10 months of the year on a part time basis. Her
tuition fees total $5,640.
Case B Ms. Sykes is not married and has no dependants. All of her income is from
employment. In December, she wins $2,000,000 in the provincial lottery. She
donates $150,000 of this amount to the church where she prayed for a winning lottery
ticket. She plans to claim $35,000 of this donation for a tax credit in 2018.
Case C Ms. Sykes is married and her husband, Buff has Net Income For Tax Purposes
of $7,600. All of her income is from rental properties. They have one child, Martin.
He is 10 years old, has no income of his own, and qualifies for the disability tax credit.
Buff’s 73 year old father, Harry, lives with them. His Net Income For Tax Purposes was
$17,600. He is not mentally or physically infirm.
Case D Ms. Sykes is married and her husband, Buff has Net Income For Tax
Purposes of $2,540. All of her income is employment income. Wanda and Buff have
two children, Janice who is 10 years of age, and Mark who is 20 years of age. Both chil-
dren are in good health. As Mark has been unable to find full-time employment, he
still lives at home. Mark had Net Income For Tax Purposes of $2,460 from part-time
employment. Janice had no income during the year. During 2018, Ms. Sykes paid for
the following medical expenses:
Wanda $ 2,100
Buff 360
Janice 3,645
Mark 4,520
Total $10,625
Case E Ms. Sykes is married and her husband, Buff is 66 years old. All of her income
is from employment. Wanda and Buff have two children, a son aged 12 and a
daughter aged 14. Both children are in good health and have no income of their own.
Buff is disabled and qualifies for the disability tax credit. His Net Income For Tax
Purposes consists of $9,600 in pension income from his former employer. He is not
eligible for OAS. He attends university on a full time basis for 8 months of the year and
his tuition costs for 2018 are $8,450.
Required: In each Case, calculate Ms. Sykes’ minimum federal Tax Payable for 2018. Indi-
cate any carry forwards available to her and her dependants and the carry forward provisions.
Ignore any tax amounts that Ms. Sykes might have had withheld or paid in instalments.


(Individual Tax Payable - Simple)
Mr. Dennis Lane has been a widower for several years. For 2018, both his Net Income For Tax
Purposes and Taxable Income were equal $70,000, all of which is net employment income.
Mr. Lane’s employer withheld $10,100 in federal income taxes, $858 for Employment Insur-
ance premiums and $2629 in Canada Pension Plan contributions. Because of an error by his
employer, an over contribution of $35 was made for the Canada Pension Plan.
Other Information:
1. Mr. Lane made political contributions to federal political parties in the amount of $450.
2. Mr. Lane has three children, aged 10, 12, and 15. They all live with him in his principal
residence. His 15 year old son had Net Income For Tax Purposes of $8,200 during the
3. Mr. Lane paid $4,400 for hospital care for his 15 year old son. He paid no other medical
expenses during the year.
Required: Calculate Mr. Lane’s federal tax payable (refund) for 2018.


(Comprehensive Tax Payable)
Mr. John Barth has been employed for many years as a graphic illustrator in Kamloops, British
Columbia. His employer is a large publicly traded Canadian company. During 2018, his gross
salary was $82,500. In addition, he was awarded a $20,000 bonus to reflect his outstanding
performance during the year. As he was in no immediate need of additional income, he
arranged with his employer that none of this bonus would be paid until 2023, the year of his
expected retirement.
Other Information:
For the 2018 taxation year, the following items were relevant.
1. Mr. Barth’s employer withheld the following amounts from his income:
Federal Income Tax $16,000
Employment Insurance Premiums 858
Canada Pension Plan Contributions 2,594
United Way Donations 2,000
Payments For Personal Use Of Company Car 3,600
2. During the year, Mr. Barth is provided with an automobile owned by his employer. The
cost of the automobile was $47,500. Mr. Barth drove the car a total of 10,000 kilometers
during the year, of which only 4,000 kilometers were related to the business of his
employer. The automobile was used by Mr. Barth for ten months of the year. During the
other two months, he was out of the country and he was required to leave the automobile
with one of the other employees of the corporation.
3. During the year, the corporation paid Mega Financial Planners a total of $1,500 for
providing counseling services to Mr. Barth with respect to his personal financial situation.
4. In order to assist Mr. Barth in purchasing a ski chalet, the corporation provided him with a
5 year loan of $150,000. The loan was granted on October 1 at an interest rate of 1
percent. Mr. Barth paid the corporation a total of $375 in interest for 2018 on January 20,
2018. Assume that, at the time the loan was granted and throughout the remainder of the
year, the relevant prescribed rate was 2 percent.
5. Mr. Barth was required to pay professional dues of $1,800 during the year.
6. On June 6, 2018, when Mr. Barth exercised his stock options to buy 1,000 shares of his
employer’s common stock at a price of $15 per share, the shares were trading at $18 per
share. When the options were issued, the shares were trading at $12 per share. During
December, 2018, the shares were sold at $18 per share.
7. Mr. Barth lives with his wife, Lynda. Lynda is blind and qualifies for the disability tax
credit. She has Net Income For Tax Purposes of $1,250.
8. His 22 year old dependent daughter, Marg, is a full time student for 8 months of the year.
She has Net Income For Tax Purposes and Taxable Income of $15,300. She had withheld
from her employment income EI premiums of $254 [(1.66%)($15,300)] and CPP contri-
butions of $584 [(4.95%)($15,300 - $3,500)]. Mr. Barth paid Marg’s tuition for 2018 of
$6,300. She has agreed to transfer the maximum tuition amount to her father.

9. Mr. Barth paid the following medical costs during the year:
For Himself $ 200
For His Wife 3,550
For Marg 720
Total $4,470
Required: Calculate, for the 2018 taxation year:

A. Marg’s minimum federal Tax Payable and any carry forward amounts available to her at
B. Mr. Barth’s minimum Taxable Income and federal Tax Payable (Refund).


(Tax Payable - Simple)
Mr. Samuel Kern is an administrator for a publicly traded Canadian manufacturing company.
His gross salary for the year ending December 31, 2018 is $67,600. Mr. Kern’s employer with-
held the following amounts from his income:
Federal Income Tax $7,200
Canada Pension Plan Contributions 2,594
Mr. Kern’s employer made a matching contribution of $1,800 to his registered pension plan
and a $150 matching contribution for the group disability insurance.
Other Information:
1. Mr. Kern is provided with an automobile that has been leased by his employer. The lease
payments are $815 per month, an amount which includes all taxes and an $89 monthly
payment for insurance. The total operating costs of the car were $4,600 for the year and
they were paid by the employer. The car is used by him for 9 months of the year and,
during the months of non-use, it must be returned to the premises of his employer. During
2018, he drives it a total of 32,000 kilometers. Of this total, 29,000 kilometers were for
travel required in pursuing the business of his employer and the remainder was for
personal use. He reimbursed his employer $50 per month of use for his personal use of
the automobile.
2. During 2018, the disability plan provided him with benefits of $1,650 after he was
injured. Mr. Kern began making contributions to this plan in 2017 and paid $200 for that
year. The plan provides periodic benefits that compensate for lost employment income.
3. Mr. Kern was required to pay 2018 dues to his professional association in the amount of
$1,233.
4. Mr. Kern was given options to buy 200 shares of his employer’s stock at a price of $75 per
share 2 years ago. At the time the options were issued, the shares were trading at $70 per
share. On June 1, 2018, Mr. Kern exercises the options. At the time of exercise, the shares
are trading at $83 per share. He is still holding the shares at the end of the year.
5. Mr. Kern donated $500 to the Canadian Cancer Society in 2017, but forgot to claim the
donation in 2017. He has found the donation receipt in his files.
6. Mr. Kern lives with his wife and 23 year old son, David. His wife has Net Income For Tax
Purposes of $3,660. David is a full time student at university for 8 months of the year and
has Net Income For Tax Purposes of $5,780. Mr. Kern has paid David’s tuition for 2018 of
$6,700, and in return, David has agreed to transfer the maximum tuition amount to his
father.
7. Mr. Kern paid the following medical costs:
For Himself $2,100
For His Wife 770
For David 3,260
Total $6,130

Required: Calculate, for the 2018 taxation year, Mr. Kern’s minimum Taxable Income and
federal Tax Payable (Refund). Indicate any carry forwards available to him and his depend-
ants and the carry forward provisions. Ignore all GST considerations.

Mr. Lance Strong is a skilled carpenter who has been employed by a large public company for
2 years. For 2018, his annual salary is $72,000. He is required to pay for his own tools, but is
reimbursed for out-of-pocket travel costs when he is required to work away from his
employer’s municipality for more than 12 hours. His disability plan provides periodic bene-
fits that are designed to compensate for lost employment income.
During 2018, Mr. Strong’s employer withheld the following amounts from his compensation:
EI Premiums $ 858
RPP Contributions 4,200
Contributions To Disability Plan
(Employer Makes Matching Contribution) 430
Mr. Strong is married and has two children aged 14 and 16. Neither child has any income
during 2018. His spouse has 2018 income of $5,600. Mr. Strong’s 67 year old mother lives
with the family. Her Net Income For Tax Purposes of $8,500 consists of OAS payments and
investment income. She is not mentally or physically infirm.
Other Information:
1. Mr. Strong is provided with an automobile by his employer. During 2018, it is driven
32,000 kilometers, of which 15,000 are employment related. The automobile is leased
by the employer at a monthly rate of $565, including HST of $65. The monthly rate also
includes a payment for insurance of $40 per month. The automobile was used by Mr.
Strong for 10 months during 2018. During the 2 months that he did not use the automo-
bile, he was required to return it to his employer's garage.
2. During 2018, Mr. Strong was required to buy $2,000 in carpentry tools in order to carry
out his employment duties.
3. Mr. Strong’s employer encourages its employees to take university courses by paying their
tuition fees. During 8 months of 2018, Mr. Strong was in part time attendance for two
university courses. The first course was devoted to 16th century liturgical chants and the
second was a course in spoken French. The tuition for each course was $600, with the
employer paying the full amount. The employer was particularly interested in the French
course as it would allow Mr. Strong to deal more effectively with francophone clients.
4. Mr. Strong incurred $4,600 in travel costs during 2018, all of which were reimbursed by
his employer.
5. When Mr. Strong began working for his employer in the previous year, he put his house on
the market. Due to a major rezoning issue, his house did not sell until 2018. Mr. Strong
purchased a heritage home that was 50 kilometers closer to his employer’s main office. To
assist with the relocation, on April 1, 2018, his employer provided an interest free loan of
$150,000. It must be repaid in full on April 1, 2021. Assume that during the first two quar-
ters of 2018 the prescribed rate was 2 percent and that during the last two quarters it
declined to 1 percent.

6. During 2018, Mr. Strong pays for the following eligible medical costs:
For Himself $1,250
For His Spouse 2,300
For His Two Children 850
For His Mother 1,960
Total Medical Costs $6,360
7. During 2018, Mr. Strong donates cash of $1,200 to his church. He also donates carpenter
services with a market value of $1,500.
Required: Calculate, for the 2018 taxation year, Mr. Strong’s minimum Taxable Income and
federal Tax Payable (Refund). Ignore any amounts that might have been withheld by his
employer or paid in instalments.


Mr. Andrew Bosworth works for a publicly traded company. During 2018, his base salary was
$180,000. In addition, he received commissions totaling $11,500 and a bonus of $38,000.
None of the bonus will be paid until January, 2019.
During 2018, his employer withholds the following amounts from his salary:
Registered Pension Plan Contributions $5,200
EI Premiums 858
Contributions To The Local United Way 2,400
Life Insurance Premiums
Mr. Bosworth is married and has two children. Mr. Bosworth’s daughter is 12 years old and has
been blind since birth. As Mr. Bosworth’s spouse is responsible for her care, she has not taken
a full-time position of employment. She has Net Income For Tax Purposes of $6,450 resulting
from part-time employment.
His 19 year old son attends a local university and lives at home. His tuition for the 8 months of
attendance during 2018 was $7,650. His father paid the tuition and, in addition, paid $560 in
ancillary fees and $425 for textbooks. The ancillary fees were charged to all students
attending the university. The son had 2018 Net Income For Tax Purposes of $12,450 resulting
from investments he inherited from his grandfather. The son’s only tax credit is the basic
personal credit for single persons. He has agreed to transfer the maximum tuition amount to
his father.
Other Information
1. Mr. Bosworth’s employer provides him with an automobile that is leased for $925 per
month, including a $75 per month payment for insurance. During 2018, the automobile
is driven a total of 62,000 kilometers, of which 41,000 involve employment related activi-
ties. Mr. Bosworth paid all of the $10,300 in 2018 operating costs and is not reimbursed
by his employer. The automobile was used by Mr. Bosworth throughout 2018.
2. In 2017, Mr. Bosworth received options to acquire 5,000 shares of his employer’s
common stock at a price of $9.75 per share. This was the market price of the shares at the
time the options were granted. On July 1, 2018, when the shares were trading at $12.35,
Mr. Bosworth exercises all of these options. He is still holding the acquired shares at the
end of 2018.
3. Mr. Bosworth is not reimbursed for advertising, entertainment or travel costs. In addition
to the operating costs for his vehicle, he paid for the following employment related costs:
Meals While Traveling $ 6,420
Hotels 10,350
Advertising 12,400
Entertainment 6,500
Total $35,670
4. Mr. Bosworth’s employer provides all employees with a luxury weekend at a local resort.
The cost of the gift is $2,500 for each employee.

5. Mr. Bosworth pays for the following medical expenses during 2018:
For Himself $ 1,200
For His Spouse 2,250
For His Son 2,340
For His Daughter (including $9,000 in attendant care) 11,250
Total $17,040
6. Because of his ongoing interest in Elizabethan drama, Mr. Bosworth enrolls in a course on
Shakespeare’s tragedies at the local university. His tuition was $1,670 and his required
textbooks cost $165. The duration of the course was 4 months.
Required:
A. Determine Mr. Bosworth’s minimum Net Income For Tax Purposes for the 2018 taxation
year.
B. Determine Mr. Bosworth’s minimum Taxable Income for the 2018 taxation year.
C. Based on your answer in Part B, determine Mr. Bosworth’s federal Tax Payable for the
2018 taxation year. Ignore any amounts that might have been withheld by his employer,
any amount paid in instalments and any considerations related to HST, GST, or PST.

SSS Problem Four - 1


(Personal Tax Credits - 5 Cases)
In each of the following independent Cases, determine the maximum amount of 2018
personal tax credits, including transfers from a spouse or dependant, that can be applied
against federal Tax Payable by the taxpayer.
A calculation of Tax Payable is NOT required, only the applicable credits.
1. Jack Brown has Net Income For Tax Purposes of $97,000, all of which is employment
income. His employer has withheld and remitted the required EI and CPP amounts. He is
married to Janice Brown whose Net Income For Tax Purposes is $7,250. They have three
children aged 7, 9, and 11. All of the children are in good health. None of them have
income of their own.
2. Marion Barkin was divorced from her husband several years ago. She has custody of their
three children, ages 9, 12, and 15. The children are all in good health. Her Net Income
For Tax Purposes consists of spousal support payments totaling $48,000 per year. Only
the 15 year old child had any income for the year. The 15 year old had Net Income For Tax
Purposes of $9,500 during the year.
3. John Appleton has Net Income For Tax Purposes of $86,500, none of which is employ-
ment income or income from self-employment. His spouse has Net Income For Tax
Purposes of $5,650. Their daughter is 15 years old, lives with them, and has Net Income
For Tax Purposes of $1,550. Their son is 22 years old and, because of a physical disability,
continues to live with them. He has no income of his own. His disability is not severe
enough to qualify for the disability tax credit.
4. Sarah Pale is 67 years old and has Net Income For Tax Purposes of $52,500. This total is
made up of OAS payments and pension income from her former employer. Her husband
is 62 years old and has Net Income For Tax Purposes of $4,840. Ignore the possibility of
splitting Sarah's pension income.
5. Martin Land has Net Income For Tax Purposes of $126,420, all of which is rental income.
His wife has Net Income For Tax Purposes of $1,200. They have three children, ages 14,
16, and 19. All of these children are in good health and continue to live at home. The 19
year old child has Net Income For Tax Purposes of $7,240. During the current year, Mr.
Land pays the following medical expenses:
Himself $ 2,450
His Spouse 3,240
Total $14,320


(Individual Tax Payable - 7 Cases)
There are seven independent cases which follow. Each case involves various assumptions as to
the amount and type of income earned by Mr. Bob Barnes during 2018, as well as to other
information that is relevant to the determination of his Tax Payable. Bob's Net Income For Tax
Purposes is equal to his Taxable Income in all Cases.
In those cases where we have assumed that the income was from employment, the employer
withheld the maximum EI premium and CPP contribution.
Case 1 Bob Barnes is 52 years old, has employment income of $75,000, and makes
contributions of $4,500 to registered charities. He is not married and has no
dependants.
Case 2 Bob Barnes is 58 years old and has employment income of $75,000. His
common-law partner is 53 years old and has income of $6,480. They have an adopted
son who is 19 years old and lives at home. Bob and his partner have medical expenses
of $4,300. Medical expenses for the son total $5,600. The son has Net Income For
Tax Purposes of $4,200.
Case 3 Bob Barnes is 58 years old and has income from investments of $95,000. He
is divorced and has been awarded custody of his 21 year disabled son. The son quali-
fies for the disability tax credit. He has Net Income For Tax Purposes of $8,000, and is
dependent on his father for support.
Case 4 Bob and his wife Gabrielle are both 67 years of age. Gabrielle is sufficiently
disabled that she qualifies for the disability tax credit. The components of the income
earned by Bob and Gabrielle are as follows:
Bob Gabrielle
Interest $ 750 $ 750
Canada Pension Plan Benefits 8,600 Nil
Old Age Security Benefits 7,000 7,000
Income From Registered Pension Plan 34,500 1,450
Total Net Income $50,850 $9,200
wife Gabrielle is 48 years old and has Net Income For Tax Purposes of $8,400. They
have a 20 year old son who lives at home. He is dependent because of a physical infir-
mity. However, he is able to attend university on a full time basis for 8 months during
2018. Bob pays his tuition fees of $7,900, as well as $725 for the textbooks that he
requires in his program. The son has Net Income For Tax Purposes of $10,000. He
agrees to transfer the maximum tuition amount to his father.
Case 6 Bob Barnes is 43 years old and has rental income of $95,000. His wife died
last year. He has two children. Summer is 12, is in good health, and has no income
during the year. His son, Martin is 15 and is physically infirm, but not sufficiently to
qualify for the disability tax credit. He has income from part time work designing
websites of $7,250.

wife Gabrielle is 37 years old and has Net Income For Tax Purposes of $4,600. They
have no children. However, they provide in home care for Gabrielle's father who is 62
years old, dependent because of a physical infirmity and has no income of his own.
His disability is not severe enough to qualify for the disability tax credit. Also living
with them is Bob's 67 year old father. He is in good physical and mental health and has
Net Income For Tax Purposes of $18,300.
Required: In each Case, calculate Bob Barnes' minimum federal Tax Payable for 2018.
Indicate any carry forwards available to him and his dependants and the carry forward provi-
sions. Ignore any amounts Bob might have had withheld or paid in instalments.


Ms. Angelina Bradmore is a very successful salesperson for a large publicly traded company.
For 2018, her base salary is $250,000. In addition, she received commissions totaling
$12,000 during the year. For 2018, she also received a bonus of $32,000, one-half of which
was paid during 2018, with the remainder due on January 31, 2019.
During 2018, her employer withholds the following amounts from her salary:

EI Premiums 858
Contributions To The Local United Way 1,200
Life Insurance Premiums
Ms. Bradmore is divorced and has custody of her 12 year old son and 10 year old daughter,
both of whom live with her. Her daughter, who is legally blind, has no income of her own
during 2018. Her son has summer job employment income of $2,350.
Other Information
1. Ms. Bradmore’s employer provides her with an automobile that has a cost of $47,460,
including applicable HST. During 2018, the automobile is driven 53,000 kilometres, of
which 48,000 were for employment related activities. Ms. Bradmore pays all of the oper-
ating costs for the car. For 2018, these totaled $7,950, with no reimbursement from her
employer. The automobile was used by Ms. Bradmore’s throughout 2018.
2. Because of the high level of her salary, Ms. Bradmore is required to pay her own adver-
tising and travel costs. In addition to the operating costs for her vehicle, she paid for the
following employment related costs:
Meals While Travelling $ 4,500
Hotels 9,000
Advertising 11,000
Entertainment 5,000
Total $29,500
3. Ms. Bradmore received options to acquire 2,500 shares of her employer’s common stock
2 years ago. The option price was $50 per share, the market value of the common shares
at the time the options were granted. During July, 2018, after the market price of the
shares reaches $72 per share, Ms. Bradmore exercises all of these options. She is still
holding the shares at the end of the year.
4. Her employer provides all employees with gifts on their birthday. For 2018, Angelina
received a $250 certificate for a massage and facial at a local spa along with $200 in cash.
5. Ms. Bradmore contributes $5,000 to the Save The Children Fund, a registered Canadian
charity.

6. Ms. Bradmore pays for the following medical expenses during 2018:
For Herself $ 4,800
For Her Son 3,200
For Her Daughter (All Attendant Care) 2,400
Total $10,400
7. In order to improve her ability to deal with people, Ms. Bradmore enrolled in a part time,
human resources program at a local university. Her 2018 tuition totalled $1,890.
Required:
A. Determine Ms. Bradmore’s minimum Net Income For Tax Purposes for the 2018 taxation
year.
B. Determine Ms. Bradmore’s minimum Taxable Income for the 2018 taxation year.
C. Determine Ms. Bradmore’s federal Tax Payable for the 2018 taxation year. Ignore any
amounts that might have been withheld by her employer or paid in instalments.

SSS Solution Four - 1

The amount of the personal tax credits would be as follows:
1. Mr. Brown will qualify for the following credits:

Basic Personal Amount $11,809
Spousal ($11,809 - $7,250) 4,559
EI (Maximum) 858
CPP (Maximum) 2,594
Canada Employment 1,195
Total Credit Base $21,015
Rate 15%
Total Credits $ 3,152
2. Ms. Barkin will qualify for the following credits:

Eligible Dependant 11,809
Rate 15%
Note The eligible dependant credit can be taken for any child. It should not be
claimed for the 15 year old as the amount of the credit would be reduced due to his
income.
3. Mr. Appleton will qualify for the following credits:

Spousal ($11,809 - $5,650) 6,159
Canada Caregiver - 22 Year Old Son 6,986
Rate 15%

4. Ms. Pale will qualify for the following tax credits:

Spousal ($11,809 - $4,840) 6,969
Age [$7,333 - (15%)($52,500 - $36,976)] 5,004
Pension Income 2,000
Rate 15%
Note that, because her income is below the income threshold, there will be no claw-
back of Ms. Pale’s OAS receipts.
5. Mr. Land will qualify for the following tax credits:

Spousal ($11,809 - $1,200) 10,609
Medical Expenses (See Note) 11,801
Rate 15%
Note The claim for medical expenses is determined as follows:

Expenses For Martin, His Spouse, And Under 18
Dependants ($2,450 + 3,240 + $2,620 + $1,450) $9,760
Reduced By The Lesser Of:
• [(3%)($126,420)] = $3,793
• 2018 Threshold Amount = $2,302 ( 2,302)
19 Year Old’s Medical Expenses $4,560
• [(3%)($7,240)] = $217
• $2,302 ( 217) 4,343
Total Medical Expense Claim $11,801


Case 1
The solution for this Case would be as follows:
Tax On First $46,605 $ 6,991
Tax On Next $28,395 ($75,000 - $46,605) At 20.5 Percent 5,821
Federal Tax Before Credits $12,812
Basic Personal Amount ($11,809)
EI ( 858)
CPP ( 2,594)
Canada Employment ( 1,195)
Credit Base ($16,456)
Rate 15% ( 2,468)
Charitable Donations
[(15%)($200) + (29%)($4,500 - $200)] ( 1,277)
Federal Tax Payable $ 9,067
Note As none of his income is taxed at 33 percent, this rate is not applicable to the
calculation of the charitable donations tax credit.
Case 2
The solution for this Case is as follows:
Tax On First $46,605 $ 6,991
Spousal ($11,809 - $6,480) ( 5,329)
EI ( 858)
CPP ( 2,594)
Medical Expenses (See Note) ( 7,524)
Rate 15% ( 4,396)
Note The base for the medical expense tax credit would be calculated as follows:
Bob And His Partner $4,300
• [(3%)($75,000)] = $2,250
Son’s Medical Expenses $5,600
• [(3%)($4,200)] = $126
• $2,302 ( 126) 5,474

Case 3
The solution for this Case can be completed as follows:
Tax On First $93,208 $16,544
Tax On Next $1,792 ($95,000 - $93,208) At 26 Percent 466
Eligible Dependant Including Infirm Amount
($11,809 + $2,182 - $8,000) ( 5,991)
Additional Caregiver Amount (Note) ( 995)
Transfer Of Son's Disability ( 8,235)
Rate 15% ( 4,055)
Federal Tax Payable $12,955
Note As the income adjusted eligible dependant amount is less than the Canada care-
giver amount, there is an additional amount of $995 ($6,986 - $5,991).
Case 4
Tax On First $46,605 $6,991
Tax On Next $4,245 ($50,850 - $46,605) At 20.5 Percent 870
Spousal Including Infirm Amount
($11,809 + $2,182 - $9,200) ( 4,791)
Additional Caregiver Amount (Note) ( 2,195)
Age [$7,333 - (15%)($50,850 - $36,976)] ( 5,252)
Pension ( 2,000)
Spouse’s Age ( 7,333)
Spouse’s Disability ( 8,235)
Spouse’s Pension (= RPP Payments) ( 1,450)
Rate 15% ( 6,460)
Note As the income adjusted spousal amount is less than the Canada caregiver amount,
there is an additional amount of $2,195 ($6,986 - $4,791).
The Old Age Security and Canada Pension Plan receipts are not eligible for the pension
income credit, only the Registered Pension Plan income is eligible. As Gabrielle’s income is
below the income threshold, there is no reduction in her age credit.

Case 5
Tax On First $144,489 $29,877
Tax On Next $17,511 ($162,000 - $144,489) At 29 Percent 5,078
Spousal ($11,809 - $8,400) ( 3,409)
Canada Caregiver - Son ( 6,986)
EI ( 858)
CPP ( 2,594)
Transfer From Son (Note) ( 5,000)
Rate 15% ( 4,778)
Note: The transfer from the son is as follows:

Tuition Fees $ 7,900
Maximum Transfer ( 5,000)
Carry Forward (For Son’s Use Only) $ 1,900
The son's Tax Payable is completely eliminated by his basic personal credit. He can
transfer a maximum of $5,000 of his tuition amount to his father. The remaining
$1,900 can be carried forward indefinitely, but must be used by the son.
Case 6
Tax On First $93,208 $16,544
Tax On Next $1,792 ($95,000 - $93,208) At 26 Percent 466
Eligible Dependant - Summer ( 11,809)
Canada Caregiver For Child ( 2,182)
Rate 15% ( 3,870)
Note Bob has claimed Summer as his eligible dependant because her income is less
than Martin's. This means that there is no erosion of the base for the eligible dependant
credit.

Case 7
Tax On First $46,605 $ 6,991
Spousal ($11,809 - $4,600) ( 7,209)
Canada Caregiver - Gabrielle's Father ( 6,986)
Canada Caregiver - Bob's Father Nil
EI ( 858)
CPP ( 2,594)
Rate 15% ( 4,598)
Because he is infirm, Gabrielle's father is eligible for the Canada caregiver credit.
However, as Bob's father is in good health, he is not eligible for this credit.


Part A
Ms. Bradmore’s minimum Net Income For Tax Purposes would be calculated as follows:
Salary $250,000
Additions:
Commissions 12,000
Bonus (Note 1) 16,000
Life Insurance Premiums (Employer’s Contribution) 460
Automobile Benefit (Note 2) 2,847
Gift (Cash Gifts Create A Taxable Benefit) 200
Stock Option Benefit (Note 3) 55,000
Deductions:
RPP Contributions ( 7,500)
Employment Expenses (Note 4) ( 18,450)
Net Income For Tax Purposes $310,557
Note 1 Only the $16,000 [(1/2)($32,000)] of the bonus that was received during the
year is included in her income for the current year.
Note 2 The standby charge would be calculated as follows:

[(2%)($47,460)(12)(5,000 ÷ 20,004)] = $2,847
There would be no operating cost benefit as Ms. Bradmore paid for all of the operating
costs.
Note 3 The total employment income inclusion would be $55,000 [(2,500)($72 -

$50)]. As the option price was equal to the market price at the time the options were
issued, one-half of this amount can be deducted in the determination of Taxable
Income (Part B).
Note 4 Potentially deductible expenses are as follows:

Car Operating Costs [(48,000 ÷ 53,000)($7,950)] $ 7,200
Meals [(50%)($4,500)] 2,250
Hotels 9,000
Subtotal for ITA 8(1)(h) and (h.1) $18,450
Advertising 11,000
Entertainment [(50%)($5,000)] 2,500
Total for ITA 8(1)(f) - Limited To Commissions $31,950
All of these costs can be deducted under ITA 8(1)(f). However, the total deduction is
limited to her commission income which is only $12,000. Alternatively, the car oper-
ating costs, meals, and hotels, can be deducted under ITA 8(1)(h) and (h.1). As shown
above, this total would be $18,450. As Angelina cannot simultaneously use ITA 8(1)(f)
and the combination of ITA 8(1)(h) and (h.1), she will minimize her Net Income For
Tax Purposes by deducting $18,450 under the latter provisions.

Part B
Ms. Bradmore’s minimum Taxable Income would be calculated as follows:

Stock Option Deduction [(1/2)($55,000)] ( 27,500)
Taxable Income $283,057
Part C
Based on the Taxable Income calculated in Part B, Ms. Bradmore’s federal Tax Payable would
be calculated as follows:
Tax On First $205,842 $47,670

Eligible Dependant
($11,809 + $2,182) (Note 5) ( 13,991)
Transfer Of Daughter’s Disability ( 8,235)
Disability Supplement (Note 6) ( 4,804)
EI Premiums ( 858)
CPP Contributions ( 2,594)
Tuition ( 1,890)
Medical Expenses (Note 7) ( 8,098)
Rate 15% ( 8,021)
Charitable Donations (Note 8) ( 2,010)
Note 5 Ms. Bradmore will designate her daughter as her eligible dependant
because if she designated her son, the base for credit would be eroded by his income.
As the daughter is infirm, she is eligible for the extra infirm amount of $2,182. This
latter point, however, is not a factor in choosing her as the eligible dependant. If she
had not been designated as the eligible dependant, the same $2,182 would have been
available as the Canada caregiver for an infirm minor child.
Note 6 Since the attendant care costs claimed as medical expenses are less than the
threshold, there is no reduction in the disability supplement.
Note 7 The base for Ms. Bradmore’s medical expense credit can be calculated as
follows:
Eligible Medical Expenses $10,400
Lesser Of:
• [(3%)($310,557)] = $9,317
Allowable Medical Costs $ 8,098

Note 8 The charitable donations credit for the total donations of $6,200 ($5,000 +
$1,200) would be calculated as follows:
[(15%)(A)] + [(33%)(B)] + [(29%)(C)], where
A =$200
B =The Lesser Of:
• $6,200 - $200 = $6,000
• $283,057 - $205,842 = $77,215 (Note Taxable Income is used here)
C = Nil [$6,200 - ($200 + $6,000)]
The charitable donation credit would be equal to $2,010, calculated as [(15%)($200)]
+ [(33%)($6,000)].

Self Study Problem Five - 1

(CCA And Tax Planning)
For its taxation year ending December 31, 2018, Northcote Inc. has determined that its Net
Income For Tax Purposes, before any deduction for CCA amounts, is equal to $328,000. The
Company does not have any Division C deductions, so whatever amount is determined as Net
Income For Tax Purposes will also be the amount of Taxable Income for the taxation year.
On January 1, 2018, the Company has the following UCC balances:
Class 1 (Building Acquired In 2005) $2,597,000

Class 8 718,000
Class 10 524,000
During 2018, the cost of additions to Class 10 amounted to $374,000, while the proceeds
from dispositions in this class totalled $234,000. In no case did the proceeds of disposition
exceed the capital cost of the assets retired and there were still assets in Class 10 on December
31, 2018.
There were no acquisitions or dispositions in either Class 1 or Class 8 during 2018.
Required:
A. Calculate the maximum CCA that could be taken by Northcote Ltd. for the taxation year
ending December 31, 2018. Your answer should include the maximum that can be
deducted for each CCA class.
B. As Northcote’s tax advisor, indicate how much CCA you would advise the Company to
take for the 2018 taxation year, and the specific classes from which it should be deducted.
Provide a brief explanation of the reasons for your recommendation. In providing this
advice, do not take into consideration the possibility that losses can be carried either
forward or back.


(CCA Calculations)
Mr. Marker has been the sole proprietor of Marker Enterprises since its establishment 10 years
ago. This business closes its books on December 31 and, on January 1, 2018, the following
information on its assets was contained in the records of the business:
Undepreciated Original
Type Of Asset Capital Cost Capital Cost CCA Rate
Building (Class 1) $115,000 $190,000 4 Percent
Equipment (Class 8) 96,000 130,000 20 Percent
Vehicles (Class 10) 6,700 30,000 30 Percent
Equipment (Class 53)* 75,000 100,000 50 Percent
*The manufacturing and processing equipment was acquired in 2017.
Other Information:
1. During the year ending December 31, 2018, Mr. Marker’s business acquired additional
Class 8 equipment at a total cost of $52,000. This new equipment replaced equipment
that had an original cost of $75,000, which was sold during the year for total proceeds of
$35,000.
2. During the year ending December 31, 2018, Mr. Marker acquired a used automobile to
be used in his business for a total cost of $8,000. Also during this year, Mr. Marker sold
one of the trucks that was used in his business for proceeds of $25,000. This truck, which
had an original capital cost of $20,000, had achieved a high value as the result of its extra
features, which were no longer available on later models.
3. As the result of a decision to lease its premises in future years, Mr. Marker sold his building
for total proceeds of $260,000. Of the $260,000 received, $150,000 is for the land on
which the building is situated. The adjusted cost base of the land was equal to the
$150,000 proceeds of disposition.
Required: Calculate the total effect of all of the preceding information on Mr. Marker’s Net
Income For Tax Purposes for the year ending December 31, 2018. Your answer should include
the maximum CCA that can be deducted by Mr. Marker for each class. In addition, calculate
the January 1, 2019 UCC balance for each Class.


(CCA Calculations Over 4 Years)
After several years of hard work at the Shawarma Palace Lebanese restaurant, the Haddad
brothers decide to start Shawarma On Wheels, a business that will have quick delivery of
freshly made Lebanese food. This partnership begins operations on September 1, 2015 and
will have a taxation year that ends on December 31. The brothers plan to take maximum CCA
in every year.
On September 12, 2015 the business acquires 20 small cars that will be used for deliveries.
These vehicles have an individual cost of $21,500 each. They run a very successful advertising
campaign using online coupons and social media that is directed at downtown condo owners.
During the 2016 taxation year, 6 additional cars are acquired at a cost of $22,800 each. These
new vehicles replace 6 of the original cars which are sold for proceeds of $11,400 each.
Shawarma On Wheels accounts for each car sale on an asset by asset basis for tax purposes.
During the 2017 taxation year, 18 additional cars are acquired at a cost of $24,300 each. Also
during this year, the remaining 14 cars from the 2015 purchase are sold. As all the cars had
high mileage, the total proceeds from this sale are $137,200.
In talking to their drivers, the Haddad brothers are repeatedly told that delivering high quality
Lebanese food is a great way to meet attractive young women. As a result, the brothers decide
to start doing some deliveries themselves. In order to try to improve their success in this area,
they acquire two BMW 6 series convertibles at a cost of $135,000 each. These are to be used
exclusively for making deliveries to female callers who are offered a discount if they come
down to the lobby to pick up their orders, thus seeing the impressive cars.
Early in 2018, the authorities discover that, in addition to delivering Lebanese food, the
brothers have also been providing their clients with a variety of illegal substances. In addition
to having to pay hefty fines, they are each sentenced to 3 years in prison. Given this,
Shawarma On Wheels is closed down on September 30, 2018. The 24 remaining regular
delivery cars are sold for $8,300 each. The two BMW convertibles are sold for $85,000 each.
Required: For each of the taxation years 2015 through 2018, calculate the maximum avail-
able CCA deduction. In addition, determine the amount of any capital gain, recapture, or
terminal loss that arises on any of the transactions that occurred during these years. Ignore
GST/HST/PST considerations.


All Night Service Ltd. was incorporated on April 1, 2016 to supply computer service 24 hours
per day. At the time of incorporation, the Company establishes December 31 as its year end
for both tax and accounting purposes.
On April 1, 2016, the Company acquired a new building to be used as an office and communi-
cations centre at a cost of $250,000. This total cost is allocated $180,000 to the building and
$70,000 to the land. As the building is being used 100 percent for non-residential purposes, it
is allocated to a separate Class 1. Also on this date, the Company purchased six cars to be used
by the service technicians at a cost of $25,000 per vehicle.
On May 1, 2016, the Company purchased a variety of computer repair and maintenance
equipment at a cost of $48,000. The Company owns no computers as it leases all of its
computer hardware and software.
During 2017, the Company trades in three of its old cars on three new minivans. The list price
of the new minivans is $24,000 per vehicle, and the Company receives a trade-in allowance
towards this list price of $14,000 per old vehicle.
On September 20, 2018, a convertible is acquired at a cost of $98,000 for use by the president
of the Company. In addition, several unusual events occur during 2018. They are as follows:
• Equipment that had a value of $12,000 was stolen by one of the service technicians.
• One of the original six cars was involved in a severe accident, resulting in repair costs of
$8,270. Because the Company’s insurance has a deductibility clause, the insurance
proceeds covered only $7,770 of these repair costs.
• Because he had never received a speeding ticket (despite numerous violations) while
driving the car allocated to him, a departing service technician offers the Company
$27,000 for one of its original six cars. The Company accepts the offer.
Required:
A. Determine the maximum CCA that can be taken in each of the years 2016 through 2018.
In your calculations, include and identify the January 1, 2017, January 1, 2018, and
January 1, 2019 UCC balances. Ignore GST/HST/PST considerations.
B. Explain the tax effects of the unusual events that occurred during 2018.


(Purchase And Sale Of Goodwill)
Traxit is a Canadian public company with a taxation year that ends on December 31. It is the
policy of Traxit Ltd. to claim maximum CCA for all Classes. On January 1, 2018, Traxit had no
balance in its Class 14.1.
What follows is two independent cases involving payments for goodwill and receipts for good-
will. In each case assume that Traxit has no other transactions during 2018 or 2019 that
involve Class 14.1.
Case One During 2018, Traxit acquires two businesses. With the first acquisition, a
payment is made for goodwill of $56,000. With the second, a payment of $124,000 is
made for goodwill. Both businesses are absorbed into the other operations of Traxit.
During 2019, Traxit sells a portion of its business and, as a consequence, receives a
payment for goodwill of $97,000.
Case Two During 2018, Traxit acquires two businesses. With the first acquisition, a
payment is made for goodwill of $34,000. With the second, a payment of $47,000 is
made for goodwill. Both businesses are absorbed into the other operations of Traxit.
During 2019, Traxit sells a portion of its business and, as a consequence, receives a
payment for goodwill of $85,000.
Required: Determine the tax consequences for the years 2018 and 2019 in each of these
two cases. Your answer should include the January 1, 2020 UCC balance for Class 14.1.


On January 1, 2018, Kars Ltd. has the following UCC balances:
Class 8 $163,000
Class 10 112,000
Class 12 42,000
Class 13 204,000
Class 14.1 (See Note) 142,290
Note On December 31, 2016, Kars Ltd. had a CEC balance of $153,000. This
balance resulted from the purchase, several years ago, of an unlimited life franchise.
As of January 1, 2017, this balance was transferred to Class 14.1.
For the taxation year ending December 31, 2018, Kars Ltd. has determined that its Net
Income For Tax Purposes, before any deduction for CCA, amounts to $43,000. As the
Company does not have any Division C deductions, Taxable Income, before any deduction for
CCA, would also amount to $43,000.
Other information related to the Company's depreciable assets is as follows:
1. All of the Class 12 assets were acquired in 2017.
2. The leasehold improvements were made in 2016 at a cost of $240,000.
3. During 2018, the cost of additions to Class 10 amount to $52,000, while the proceeds
from dispositions in this class totaled $29,000. In no case did the proceeds of disposition
exceed the capital cost of the assets retired, and there were still assets in the class as of
December 31, 2018.
4. There were no 2018 acquisitions or dispositions in Classes 8, 12, 13, or 14.1.
5. The Company has always deducted the maximum amount of CCA.
Required:
A. Calculate the maximum CCA write-off that could be taken by Kars Ltd. for the taxation
year ending December 31, 2018.
B. As Kars’ tax advisor, indicate how much CCA you would advise them to take for the 2018
taxation year and the specific classes from which it should be deducted. Provide a brief
explanation of the reason for your recommendation. In providing this advice, do not take
into consideration the possibility that losses can be carried either back or forward.


(CCA Calculations)
The following information relates to Bartel Ltd. for its fiscal year that ends on December 31,
2018:
1. The Company has UCC balances on January 1, 2018 for its tangible assets as follows:
Class 1 (All Buildings Acquired In 2005) $590,000
Class 8 570,000
Class 10 61,000
2. During 2018, the Company purchased office furniture for $14,000.
3. During 2018, the Company purchased a truck from its majority shareholder for $22,000.
The truck was four years old, had a fair market value of $22,000, and the shareholder’s
UCC for the truck was $26,000.
4. On January 1, 2015, the Company expanded its operations by purchasing another busi-
ness. The purchase price for this business included a payment of $92,000 for goodwill,
$120,000 for a franchise with a six year life, and $28,000 for a franchise with an unlimited
life. The business was absorbed into Bartel's operations and was not maintained as a sepa-
rate entity.
5. During 2016, the Company sold the unlimited life franchise that it acquired in 2015 for
$59,000.
6. During 2018, one of the Company’s buildings was sold for proceeds of $440,000, of
which $150,000 represented the value of the land on which the building was situated.
The Building had a capital cost of $475,000, of which $175,000 represented the value of
the land at the time of the acquisition.
The building was replaced during 2018 with a new building that cost $500,000, of which
$125,000 represented the value of the land. The use of this building is 100 percent office
space and it is allocated to a separate Class 1.
7. Bartel Ltd. has always deducted the maximum CCA and the maximum write-off of cumu-
lative eligible capital allowable in each year of operation.
Required:
A. Calculate the maximum total CCA that can be deducted for 2018. Your answer should
include the maximum that can be deducted for each CCA class.
B. Determine the capital cost for the goodwill in Class 14.1 on January 1, 2018.


(CCA Calculations)
The fiscal year of the Atlantic Manufacturing Company, a Canadian public company, ends on
December 31. On January 1, 2018, the UCC balances for the various classes of assets owned
by the Company are as follows:
Class 1 - Building (Note 1) $625,000
Class 8 - Office Furniture And Equipment 155,000
Class 10 - Vehicles 118,000
Class 13 - Leasehold Improvements 61,750
Class 14.1 Nil
Class 53 - Manufacturing Equipment 217,000
Note 1 The Class 1 building was acquired in 2005.
During the year ending December 31, 2018, the following acquisitions of assets were made:
Class 8 - Office Furniture And Equipment $ 27,000
Class 10 - Vehicles (Note 2) 33,000
Class 12 - Tools (Note 3) 34,000
Class 13 - Leasehold Improvements 45,000
Class 50 - Computer Hardware 28,000
Note 2 The acquired vehicle was a delivery truck.
Note 3 None of the tools that were acquired during the year cost more than $500.
During this same period, the following dispositions occurred:
Class 8 - Used office furniture and equipment was sold for cash proceeds in the
amount of $35,000. The original cost of these assets was $22,000.
Class 10 - A delivery truck with an original cost of $23,000 was sold for $8,500.
Class 53 - Since the manufacturing operations will be done by subcontractors in the
future, all of the manufacturing equipment was sold for total proceeds of $188,000.
Its original cost was $752,000.
Other Information:
1. The Company leases a building for $27,000 per year that houses a portion of its manufac-
turing operations. The lease was negotiated on January 1, 2015 and has an original term of
eight years. There are two renewal options on the lease. The term for each of these
options is four years. The Company made $78,000 of leasehold improvements immedi-
ately after signing the lease. No further improvements were made until the current year.
2. On February 24, 2018, one of the Company’s cars was totally destroyed in an accident. At
the time of the accident, the fair market value of the car was $12,300. The proceeds from
the Company’s insurance policy amounted to only $8,000. The original cost of the car
was $17,000.
3. During March, 2018, the Company granted a manufacturing licence for one of its prod-
ucts to a company in southern Ontario. This licensee paid $87,000 for the right to
manufacture this product for an unlimited period of time.
4. It is the policy of the Company to deduct maximum CCA in all years.

Required: Calculate the maximum 2018 CCA that can be taken on each class of assets, the
January 1, 2019 UCC balance for each class, and any other 2018 income inclusions or deduc-
tions resulting from the information provided in the problem.

SSS Problem Five - 1


Barbara’s Messenger Service begins operations on November 1, 2015. It operates an
intra-city service which guarantees delivery of important documents within 3 hours. Barbara
Good is the sole owner of this unincorporated business. The business will have a taxation year
that ends on December 31. Barbara indicates that she plans to take maximum CCA every year.
On November 15, 2015, the business acquires 10 small cars to be used for deliveries. These
vehicles have a cost of $18,000 each.
During the year ending December 31, 2016, the business acquires 5 additional cars at a cost
of $22,000 each. In addition, 4 of the original cars are sold for proceeds of $5,000 each.
During the year ending December 31, 2017, 8 additional cars are acquired at a cost of
$25,000 each. The remaining 6 cars that were purchased in 2015 are sold for $2,000 each.
Barbara has found that when particularly important, high value packages are involved, some
of her clients require the package to be hand delivered in an awe-inspiring style. These clients
are willing to pay a very hefty surcharge for this service. In order to accommodate this, the
business acquires two S Class Mercedes at a cost of $160,000 each.
Early in 2018, Barbara receives a proposal of marriage from her wealthiest client. Barbara
accepts this proposal and, because she will be moving to a different city, she decides to termi-
nate her business on March 31, 2018. The 13 remaining small cars are sold for $6,000 each.
The S Class Mercedes are sold for $95,000 each.
Required: For each of the taxation years 2015 through 2018, calculate the maximum avail-
able CCA deduction. In addition, determine the amount of any capital gain, recapture, or
terminal loss that arises on any of the transactions that occurred during these years. Ignore
GST/HST/PST considerations.


For its taxation year ending December 31, 2018, Brownlee Inc. has determined that its Net
Income For Tax Purposes, before any deductions for CCA, amounts to $23,500. The
Company does not have any Division C deductions, so whatever amount is determined as Net
Income For Tax Purposes will also be the amount of Taxable Income for the 2018 taxation year.
On January 1, 2018 the Company has the following UCC balances:
Class 3 $263,000
Class 8 72,000
Class 10 52,000
During 2018, the cost of additions to Class 10 amounted to $38,000, while the proceeds from
dispositions in this class totalled $23,000. In no case did the proceeds of disposition exceed
the capital cost of the assets retired, and there were still assets in the class as of December 31,
2018. There were no acquisitions or dispositions in either Class 3 or Class 8 during 2018.
Required:
A. Calculate the maximum CCA that could be taken by Brownlee Company for the taxation
year ending December 31, 2018. Your answer should include the maximum that can be
deducted for each CCA class.
B. As Brownlee’s tax advisor, indicate how much CCA you would advise them to take for the
2018 taxation year and the specific classes from which it should be deducted. Provide a
brief explanation of the reason for your recommendation. In providing this advice, do not
take into consideration the possibility that losses can be carried either back or forward.

SSS Solution Five - 1

2015 Solution
The required calculations are as follows:
Additions To Class 10 [(10 Cars)($18,000)] $180,000

One-Half Net Additions [(1/2)($180,000)] ( 90,000)
CCA Base $ 90,000
CCA [(30%)($90,000)(61/365)] ( 4,512)
One-Half Net Additions 90,000
Class 10 UCC For January 1, 2016 $175,488
As the business was established on November 1, 2015, its operations were carried out for 61
days in 2015, and only a proportionate share of the annual CCA charge may be taken. We
would call your attention to the fact that it is the length of the taxation year, not the period of
ownership of the assets, that establishes the fraction of the year for which CCA is to be
recorded.
2016 Solution
Opening Balance For Class 10 $175,488

Additions [(5 Cars)($22,000)] 110,000
Dispositions - Lesser Of:
• Capital Cost = 4 @ $18,000 = $72,000
• Proceeds Of Disposition = 4 @ $5,000 = $20,000 ( 20,000)
One-Half Net Additions [(1/2)($110,000 - $20,000)] ( 45,000)
CCA Base $220,488
CCA [(30%)($220,488)] ( 66,146)
2017 Solution
With respect to Class 10 cars, the required calculations are as follows:

Additions [(8 Cars)($25,000)] 200,000
• Capital Cost = 6 @ $18,000 = $108,000
• Proceeds Of Disposition = 6 @ $2,000 = $12,000 ( 12,000)
CCA Base $293,342
CCA [(30%)($293,342)] ( 88,003)

With respect to the two S Class Mercedes, each would have to be allocated to a separate Class
10.1. Further, the addition to each Class 10.1 would be limited to $30,000. The required
calculations would be as follows:
Mercedes 1 Mercedes 2
Class 10.1 Class 10.1
Acquisitions $30,000 $30,000
One-Half Net Additions ( 15,000) ( 15,000)
CCA Base $15,000 $15,000
CCA [(30%)($15,000)] ( 4,500) ( 4,500)
One-Half Net Additions 15,000 15,000
UCC For January 1, 2018 $25,500 $25,500
2018 Solution
The required calculations for the Class 10 vehicles are as follows:

• Capital Cost [(5)($22,000) + [(8)($25,000)] = $310,000
• Proceeds Of Disposition [(13)($6,000)] = $78,000 ( 78,000)
Ending Balance With No Remaining Assets In Class $221,339
Terminal Loss ( 221,339)
UCC For January 1, 2019 Nil
After all of the assets in Class 10 have been retired there is still a $221,339 balance in the UCC.
This results in a terminal loss that will be deducted in full from the other income of Barbara’s
Messenger Service. The terminal loss will also be deducted from the UCC balance.
With respect to the two Class 10.1 assets, no recapture or terminal losses can be recorded on
these assets. However, in the year of disposal, taxpayers are allowed to deduct one-half year
of CCA. Given the short fiscal final year, this means that on each of the Class 10.1 vehicles
there would be a CCA deduction of $943 [(1/2)(30%)($25,500)(90/365)] for a total of $1,886.


Part A
The required calculation of the maximum CCA is as follows:
Class 3 Class 8 Class 10

Opening Balance $263,000 $72,000 $52,000
Additions Nil Nil 38,000
Proceeds Of Disposition Nil Nil ( 23,000)
One-Half Net Additions Nil Nil ( 7,500)
CCA Base $263,000 $72,000 $59,500
CCA Rate 5% 20% 30%
Maximum CCA $ 13,150 $14,400 $17,850
This gives a maximum amount for CCA of $45,400 for the taxation year ($13,150 + $14,400
+ $17,850).
Part B
Since the Company only has Net and Taxable Income before CCA of $23,500 and the problem
states that loss carry overs should not be considered, maximum CCA would not be deducted
as this would produce a loss. Only $23,500 in CCA should be taken in order to reduce the
Taxable Income to nil.
With respect to the classes from which it should be taken, the usual procedure is to deduct the
required amount from the classes with the lowest rates. By leaving the classes with higher
rates untouched, larger amounts of CCA can be deducted in later periods as required.
Taking this approach, the recommended CCA deductions would be as follows:
Class 3 (Maximum Available) $13,150

Class 8 (Required Balance) 10,350
Total CCA $23,500
The deduction of this amount of CCA would serve to reduce Taxable Income to nil.
Note that if there were immediate plans to sell the building for more than its opening UCC, this
could affect the choice of Classes to deduct CCA from as any additional CCA taken on Class 1
would have to be added to income as recaptured CCA when the building is sold.

Self Study Problem Six - 1

(Bad Debts)
Dr. Allworth is a dentist with an office in one of the less prosperous sections of Vancouver.
While he has very large gross billings, his patients are such that he often has trouble collecting
the amounts that are due to him. As a consequence, he takes great care in keeping track of
outstanding balances in accounts receivable and in making estimates of the amounts that he
expects will not be collectible.
At the end of 2017, his accounts receivable balance was $104,000 and, for tax purposes, he
deducted a reserve for doubtful debts of $11,500. The corresponding balances at the end of
2018 were $208,000 in total receivables, with a reserve for doubtful debts of $15,900. Both
of the reserves were established on the basis of a detailed aging schedule, applied on a receiv-
able by receivable basis.
During 2017, there were recoveries of amounts written off as uncollectible in 2016 in the
amount of $190.
During 2018, $8,800 in accounts receivable were written off as uncollectible. However,
$700 of this amount related to a patient where there was some hope of collecting the amount
due. As the patient was a personal friend of Dr. Allworth, no real effort had been made to
collect the amount and further dental services had been extended on a credit basis. In addi-
tion, accounts totalling $1,500 that had been written off in 2017 were recovered during 2018.
Required: How would the preceding information affect the calculation of Dr. Allworth’s
business income for 2018?


(Reserves)
Olga Sadowski produces silk flower and artificial tree arrangements that are purchased by
both individuals and businesses. In 2018, her first year of operation, she has cash sales of
$112,000 and sales on account of $96,000. In addition, she has received $12,000 for
arrangements that will not be delivered until 2019. Olga does not include advances in her
sales figures.
On December 31, 2018, she has an outstanding Accounts Receivable balance of $42,000.
She estimates that $2,000 of this balance will be uncollectible.
During 2019, Olga’s cash sales increase to $146,000 and sales on account increase to
$123,000. With respect to the $12,000 in 2018 advances from customers, she delivered all of
the required arrangements. In 2019, she receives $16,000 for arrangements to be delivered
in 2020.
Actual write-offs of Accounts Receivable during 2019 totaled $2,500. On December 31,
2019, outstanding Accounts Receivable total $51,000. Olga estimates that $3,000 of this
balance will be uncollectible.
The December 31, 2019 receivables contain a single large wedding order for $15,000. Since
this personal order is from a very important business client, Olga has agreed to allow the client
to defer payment until May 1, 2020. The order was received on December 1 for a December
30, 2019 wedding .
Required: How would the preceding information affect the calculation of Olga Sadowski’s
business income for the 2018 and 2019 taxation years? Include the full details of your calcula-
tions, not just the net result for each year.


(Work Space In The Home Costs And CCA)
Veronica Hart is employed in retail sales with a large department store. Because of the exper-
tise in sports clothing that she has gained as an employee, she has decided to start a sports
clothing mail order business in order to supplement her employment income. The business
commences on January 20, 2018.
On that date, she acquires office furniture and display racks at a total cost of $14,000, a
computer for $1,350, and software appropriate to her business activities for $795. She also
has a separate telephone line installed for dealing exclusively with the mail order business.
The business will be run out of her home, making exclusive use of 15 percent of the total avail-
able floor space. The business will have a December 31 year end.
During the period January 20, 2018 through December 31, 2018, her mail order sales total
$89,000. Costs associated with these sales are as follows:
Cost Of Merchandise Sold $46,000
Unsold Merchandise (Lower Of Cost And Market) 23,500
Packaging Materials 1,547
Shipping Costs 3,216
Miscellaneous Office Supplies 825
Telephone Charges (Total For The Period) 210
Printing Of Brochures Distributed 156
Her home was purchased several years ago for $355,000 of which $80,000 was allocated to
the land. Costs accrued with respect to the home for the year ending December 31, 2018 are
as follows:
Utilities For Home (Heat, Light, And Water) $2,850
Mortgage Interest Paid 4,183
House Insurance 400
Property Taxes 1,230
Repairs And Maintenance For Home 1,125
Total $9,788
Required:
A. Can Ms. Hart deduct work space in the home costs? Briefly explain your conclusion.
B. Compute the minimum net business income or loss that Veronica must report in her 2018
personal income tax return.
C. Briefly describe any issues that should be discussed with Veronica concerning the work
space in her home costs and business costs.


(Business Income - Employee Vs. Self-Employed)
Ms. Wise is a very successful salesperson. She pays all of her own business expenses and
provides the following information related to her taxation year ending December 31, 2018.
1. Travel costs, largely airline tickets, food, and lodging on trips outside the area in which she
resides, totaled $23,000. Included in this amount is $8,000 of business meals.
2. During the year, she used 40 percent of her personal residence as an office. She has
owned the property for two years. It is her principal place of business and it is used exclu-
sively for meeting clients on a regular basis throughout the year. Interest payments on the
mortgage on this property totalled $13,500 and property taxes for the year were $4,700.
Utilities paid for the house totalled $3,550 and house insurance paid for the year was
$950. Other maintenance costs associated with the property amounted to $1,500. The
January 1, 2018 UCC of the 40 percent portion of the residence that is used for business is
$140,000.
3. For business travel, Ms. Wise drove a car that she purchased for $53,000 on October 15,
2017. During 2018, she drove a total of 50,000 kilometers, 35,000 of these being for
business purposes. The business usage of her car varies from 60 to 80 percent each year.
The total operating costs for the year were $6,000. In addition, there were financing costs
of $2,500 on a bank loan used to purchase the car. She has always taken maximum CCA
on her car.
4. She paid dues to the Salesperson’s Association (a trade union) of $600.
5. She was billed a total of $12,000 by a local country club. Of this amount, $2,500 was a
payment for membership dues and the remaining $9,500 was for meals and drinks with
clients.
Required:
A. Calculate the maximum amount of expenses that would be deductible by Ms. Wise for
2018 assuming:
i. She is an employee of a manufacturing company. Her employment income of
$137,000 includes $15,000 in commissions.
ii. She represents a group of manufacturers with a diversified product line. During 2018,
she earned total commissions of $137,000.
In making these calculations, ignore GST and PST considerations.
B. Comment on the desirability of taking CCA on Ms. Wise’s personal residence.


(Deductible Automobile Costs And Taxable Benefit)
Borris Industries is a Canadian controlled private corporation with a taxation year that ends on
December 31. Mr. John Borris is the president of the Company and an employee of Borris
Industries.
On December 1, 2017, Borris Industries leases a new Mercedes to be used by Mr. Borris. The
lease calls for monthly payments of $1,800 per month, payable on the first day of each month
for a period of three years. At the time the lease is signed, the Company is required to make a
refundable deposit of $10,000. The manufacturer’s suggested list price for the car is $85,000.
Mr. Borris will pay the Company $500 per month for his personal use of the car. This is the only
automobile that is leased by Borris Industries.
During December, 2017, Mr. Borris drives the car a total of 2,500 kilometers, none of which
are related to his Company ’s business activities. Operating costs for this period, all of which
are paid by the Company, totaled $1,100.
During 2018, Mr. Borris drives the car 45,000 kilometers, of which 23,000 were related to his
Company ’s business. Operating costs for this period, all of which are paid by the Company,
totaled $10,200.
During the period December 1, 2017 through December 31, 2018, the automobile was
always available to Mr. Borris.
Assume that the prescribed rate is 2 percent for the period December 1, 2017 through
December 31, 2018.
Required: Determine the following:

A. The maximum deduction for automobile lease payments that Borris Industries can take in
each of the two years 2017 and 2018.
B. The minimum amount of the taxable benefit that Mr. Borris will have to include in his Net
Income For Tax Purposes for each of the two years 2017 and 2018 as a result of having the
Mercedes available for his personal use. Note that the prescribed operating cost benefit
per kilometer is equal to $0.25 in 2017 and $0.26 in 2018.
Ignore GST and PST considerations in both parts of this question.


(Employer Owned Vs. Employee Owned Vehicle)
Jerry Reid will become an employee of Margo Ltd. as of January 1, 2018. His employment
contract is for a period of three years and his annual salary will be in excess of $250,000 per
year in each year. Given this, his combined federal/provincial tax rate on additional income
will be 51 percent.
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 employ-
ment contract, with 40,000 of this total being employment related travel. The automobile will
be a Lexus ES that will cost $48,000. At the end of the employment contract, its estimated fair
market value will be $20,000.
Margo Ltd. has offered him the following two alternatives with respect to the Lexus. Margo 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 allowance of $18,000 per year to cover the costs of using the automobile
for employment purposes. 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 percent. He will repay the funds at the rate of $16,000 per
year, payable on December 31, 2018, 2019, and 2020. 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 $0.26 per kilometer in all of
the years 2018 through 2020.
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.


(Valuation Of Business Inventories)
Halley Martin has designed a new skirt that proves to be particularly popular with men who
are cross-dressers. Based on the initial success of her product, she has decided to open a
boutique in downtown Toronto. She will have a December 31 year end.
The skirts are manufactured by a local clothing manufacturer to her specifications. During her
first year of operations, she has purchases as follows:
Date Quantity Price Total Cost
February 1 5,000 $42 $ 210,000
April 3 10,000 $45 450,000
July 12 8,000 $43 344,000
September 5 2,000 $48 96,000
November 12 3,000 $52 156,000
Totals 28,000 $1,256,000
On December 31, the end of her first year of operation, the inventory on hand amounts to
6,000 units. It is estimated that these units have a replacement cost of $51 per unit and a net
realizable value of $58 per unit.
Required: Calculate the various closing inventory values that could be used to determine
business income for tax purposes. Your answer should indicate the valuation method being
used, as well as the resulting value.


(Deductible Business Expenses - Corporation)
Astrolab Industries has a taxation year that ends on December 31. For the year ending
December 31, 2018, the Company ’s accounting statements prepared in accordance with
generally accepted accounting principles showed a Net Income of $278,000. The accountant
has provided the following other information that was used in the preparation of this Net
Income figure:
1. A total of $123,000 was deducted as income tax expense. This amount included $16,000
in future income taxes.
2. As the Company was late in making its required income tax instalments, it was required to
pay interest of $400.
3. For the year ending December 31, 2018, the Company recorded $83,000 in amortization
expense. Maximum available CCA deductions for this period were $97,000.
4. The Company’s accounting expenses included a payment of dues in a local golf club of
$2,500. The cost of entertaining clients at this club during the year ending December 31,
2018 was $9,600.
5. For accounting purposes, no allowance for bad debts was established at either the begin-
ning or the end of 2018. The $5,200 bad debt expense that was included in the
accounting records reflected only the amounts that were written off during the year. For
tax purposes, the Company deducted a reserve of $3,400 for the taxation year ending
December 31, 2017. An appropriate reserve for the year ending December 31, 2018
would be $4,200.
6. The 2018 accounting expenses include $1,500 for the premiums on a life insurance policy
on the life of the Company’s president. The Company is the beneficiary of this policy.
One of the Company’s major creditors requires that this policy be in force during all
periods in which there are loan balances outstanding.
7. The 2018 accounting expenses included $37,000 in bonuses that were declared in favour
of Company executives. Only $12,000 of these bonuses were paid in 2018, with the
balance being payable in February, 2019.
8. The bond interest expense that is included in the accounting records includes $3,200 in
discount amortization.
9. On December 31, 2018, the Company paid landscaping costs of $27,000. These costs
were treated as capital expenditures for accounting purposes and, as the expenditure was
made at the end of the year, no amortization was recorded in the 2018 financial
statements.
Required: For each of the preceding items, indicate the appropriate treatment in the tax
records of Astrolab Industries Ltd. for the year ending December 31, 2018. For those items
that require an adjustment of accounting Net Income in order to arrive at Net Income For Tax
Purposes, indicate the specific adjustment that would be required, including the amount of
the adjustment. The calculation of Net Income For Tax Purposes is not required.


(Comprehensive Business Income)
Barnes Industries Ltd. is a Canadian private company located in Nova Scotia. Mike Barnes,
the majority shareholder of the Company, devotes all of his time to managing the operations of
this enterprise. Over the years, the business has consistently shown a profit and, for the taxa-
tion year ending December 31, 2018, Mike has determined that the Company ’s Net Income
After Income Taxes is $340,000.
In determining this income figure, Mike has used generally accepted accounting principles.
Other information with respect to the determination of accounting income before taxes for
2018 is as follows:
1. The Income Tax Expense deducted by Barnes Industries Ltd. for the year is $86,000,
including $13,000 in future income taxes.
2. During the year, the Company has deducted donations to various registered charities in
the amount of $3,500.
3. The Company recorded amortization expense for the year of $241,000.
4. The maximum CCA for the year has been correctly determined to be $389,000.
5. After attending a seminar on the tax advantages of income splitting among family
members, Mike hires his unemployed cousin to do filing in the office. She proves to be
totally incapable of doing the job and is asked to leave after only one day. In the interests
of family harmony, he pays her $10,000, which is deducted in the accounting records of
the Company.
6. The Company has deducted $23,000 for advertising in newspapers in several U.S.
cities. The advertising is directed towards selling the Company’s products to Americans
living in those areas.
7. The Company provides warranties on several of the products that it sells. For its
accounting records, it estimates the cost of providing these warranties and records a
liability on the basis of these estimates. The liability at the beginning of the year was
$18,000 and the corresponding figure at the end of the fiscal year was $27,000.
8. At the end of 2017, the Company estimated that its bad debts on ending accounts receiv-
able would total $31,000. Actual write-offs during 2018 amounted to $35,000. At the
end of 2018, the estimate of bad debts on ending accounts receivable was $33,000. The
accounting estimates are considered appropriate for tax purposes.
9. On December 31, 2018, the Company issued new common shares. The legal and
accounting fees related to this issue of shares were $8,000. For accounting purposes,
these costs were added to the intangible asset, organization costs. As the issue of shares
was on December 31, there was no 2018 amortization of this amount for accounting
purposes.
10. In January, 2018, the Company paid landscaping costs of $11,000 that were expected to
have a useful life of 10 years. These costs were capitalized for accounting purposes and
are being amortized on a straight line basis over a period of ten years. (This amortization is
included in the amortization expense of $241,000 listed in Part 3.)
11. As a result of Mike’s business travel, the Company incurred costs for meals and entertain-
ment in the amount of $13,500. All of these costs were deducted in the determination of
accounting income.
12. Amortization of bond discount for the year was $1,800.
13. On January 1, 2018, the Company leases a Mercedes for five years for Mike to use in his
business travels. The total 2018 lease payments amount to $18,000 and, in addition, the

Company pays all of the operating costs. These operating costs total $6,200 for the year.
There are no refundable deposits associated with the lease and the lease payments do not
include any amounts for insurance or licensing. All of these amounts are expensed in the
determination of the Company’s accounting income. The manufacturer’s suggested list
price for the car is $128,000. Mike has use of the car throughout the year. He drives it a
total of 92,000 kilometers, of which 38,000 kilometers were employment related.
Required: For Barnes Industries Ltd.’s 2018 taxation year, determine Net Income For Tax
Purposes. Indicate why you have not included any of the preceding items in your calcula-
tions. Ignore any GST/HST implications.


(Business Income With CCA)
Darlington Inc. has a fiscal year ending December 31. For the year ending December 31,
2018, the Company ’s accounting Net Income, determined in accordance with generally
accepted accounting principles, was $596,000. Other information related to the preparation
of its 2018 tax return is as follows:
1. The income tax expense was $55,000, including $7,000 in future income tax expense.
2. The Company spent $95,000 on landscaping for its main office building. This amount was
recorded as an asset in the accounting records and, because the work has an unlimited
life, no amortization was recorded on this asset.
3. The Company spent $17,000 on advertisements in Fortune Magazine, a U.S. based publi-
cation. Approximately 90 percent of its non-advertising content is original editorial
content. The advertisements were designed to promote sales in Canadian cities located
on the U.S. border.
4. The amortization expense was $623,000. At the beginning of 2018, the Company has a
balance in Class 1 of $1,000,000, representing the UCC of its headquarters buildings. The
Company has owned this building since 2001.
In general, other buildings are leased. However, in February, 2018, a policy change
results in the acquisition of a new store building at a cost of $650,000, of which $125,000
is allocated to land. This building is used 100 percent for non-residential purposes and is
allocated to a separate Class 1. None of the usage is for manufacturing and processing .
The January 1, 2018 balance in Class 8 was $4,200,000. During 2018, there were addi-
tions to this class in the total amount of $700,000. In addition, Class 8 assets with a cost of
$400,000 were sold for proceeds of $550,000. The net book value of these assets in the
accounting records was $325,000, and the resulting gain of $225,000 was included in the
accounting income for the year. There are numerous assets remaining in the class at the
end of the 2018 taxation year.
At the beginning of 2018, the UCC in Class 10 was $800,000, reflecting the Company’s
fleet of cars. As the Company is changing to a policy of leasing its cars, all of these cars
were sold during the year for $687,000. The capital cost of the cars was $1,200,000, and
their net book value in the accounting records was equal to the sale proceeds of
$687,000.
5. Included in travel costs deducted in 2018 for accounting purposes was $12,000 for airline
tickets and $41,400 for business meals and entertainment.
6. The Company paid, and deducted, for accounting purposes, a $2,500 initiation fee for a
corporate membership in the Highland Golf And Country Club.
7. The Company paid, and deducted, property taxes of $15,000 on vacant land that was
being held for possible future expansion of its headquarters site.
Required: Calculate Darlington Inc.’s minimum Net Income For Tax Purposes for the 2018
taxation year. In addition, calculate the January 1, 2019 UCC balances for each CCA class.
Indicate why you have excluded some items from your calculations.


(Partnership - Business Income, Employee vs. Self-Employed)
The Montpetit Fashion Group is a partnership that custom designs and retails high-fashion
clothing in Calgary. The partnership commenced operations on February 1, 2018.
Part I The three partners have sought your advice on a number of issues related to the tax
procedures to be used by their business. Provide the requested advice on each of the
following issues:
A. Explain to the partners how business income from partnerships is taxed in Canada.
B. The partners have not picked a partnership year end and would like to know what options
they have.
C. Designer gowns, for which there are no production economies of scale, are designed and
made by private seamstresses who work in their own homes. Montpetit supplies the fabric
and accessories, and pays a previously agreed fixed amount upon satisfactory completion
of each gown. The partners are uncertain as to the need for source deductions (income
tax, EI and CPP contributions) on these amounts.
Part II The partners would like you to review the following transactions that occurred
during their first fiscal year of business ending on December 31, 2018. Advise the partners on
the taxability of income amounts in the calculation of net business income for the year. Simi-
larly, for expenditures, provide advice on the specific deductions (with amounts) that can be
claimed.
A. Legal fees of $2,400 were paid for the drafting of a partnership agreement.
B. Five industrial sewing machines were acquired at the beginning of the year at a cost of
$2,500 each. Sewing accessories (thread, needles, scissors, etc.) were also acquired for a
total of $8,500.
C. Each partner contributed $10,000 to get the business off the ground. On July 1, 2018,
each partner loaned the partnership $15,000. Interest of 4 percent per year on the loans
was paid by the partnership for the last six months of the year. In addition to the interest,
the partners are planning to deduct the $10,000 payments on their personal income tax
returns for the current year.
D. At year-end, designer clothes with a retail price of $260,000 are held on consignment by
boutiques throughout the city. The cost of making these clothes was $50,000 in labour
and $45,000 in fabric.
E. Montpetit paid $15,000 for the exclusive right to distribute Dali sweaters for five years.
F. During 2018, payments totalling $3,250 were made to the Champs Elysee Club. Of this
amount, $1,100 was for the annual membership fee and the remaining $2,150 was for
charges in the Crepe Suzette Diner. Of the dining charges, $1,500 was spent for enter-
taining clients and the remainder was for the personal use of the three partners.


(Proprietorship - Business Income With CCA)
Christine Powell is a visual designer. Until May, 2018, she worked as an employee for a
printing supply firm. In June, she became self-employed when she started up “Design Power”.
Through this business, Christine works with several advertising agencies in the design and
desktop publishing of promotional materials.
In January, 2018, she comes to you for tax advice. Being vaguely aware of the complexity of
the tax laws, she has kept meticulous track of all business related costs for the period from June
1 to December 31, 2018. Christine’s fiscal year end for the business is December 31.
Christine works out of her home. Her studio occupies 20 percent of the useable space in the
house. Christine does not intend to claim any CCA on the house. The total operating costs
related to the house during the period June 1, 2018 through December 31, 2018 are:
Utilities $1,500
Home Insurance 700
Mortgage Interest 1,600
Total Home Operating Costs $6,400
On June 1, 2018, Christine bought a used car for business and personal use. The total
purchase price of the car was $18,000, financed with a $3,000 cash down-payment and a
$15,000 term loan. Her detailed records show that she uses the car 70 percent for business.
The automobile costs include:
Down Payment On Car Purchase $3,000
Gasoline And Oil 1,100
Licence And Registration 200
Insurance 800
Interest On Car Loan 700
Total Automobile Costs $5,800
On July 15, 2018, Christine purchased computer equipment for $5,000 and various applica-
tions software for $1,200. On August 1, she purchased several pieces of office furniture for
$2,000. All of these assets were acquired solely for business use.
Her revenues and other costs for the period June 1, 2018 to December 31, 2018 were as
follows:
Revenues
Collected $22,000
Billed, but not collected 4,000
Unbilled work-in-progress 1,500
Costs
Legal and business licence fees $1,000
Business meals and entertainment with clients 500
Office and computer supplies 650
Printing sub-contract fees 1,800
Required: Calculate the minimum net business income Christine would include in her
2018 personal income tax return. In preparing your solution, ignore GST/HST/PST
implications.


(Proprietorship - Business Income With CCA)
Carla Jensen is Chartered Professional Accountant who is employed as an internal auditor by a
Canadian public company. The constant, unrelenting stress of her employment has resulted
in a dependency on recreational drugs. This, in turn, has resulted in the need for additional
funds. Because of this need for additional income, she operates an unincorporated tax and
accounting services business.
This business has a December 31 year end and has been in operation for several years. The
business operates out of a building which Carla purchased, new, in 2015. She uses this
building exclusively for non-residential purposes. It has been allocated to a separate Class 1.
On January 1, 2018, Carla had unbilled work in progress of $29,000. During 2018, Carla
records 800 billable hours at her billing rate of $145 per hour for a total of $116,000. She bills
$81,000 of this amount during 2018 and collects $75,800. On December 31, 2018, her
unbilled work in progress has increased to $35,000.
On January 1, 2018, the business has the following UCC balances:
Class 1 Building $226,000
Class 8 Furniture And Fixtures 46,500
Class 10 Vehicle (Purchased For $20,300) 17,255
During January 2018, Carla acquires a new computer for $1,800, along with applications soft-
ware for $725.
During March, 2018, the Class 10 vehicle is involved in a serious accident, requiring it to be
permanently taken off the road. The insurance proceeds are $12,300. On April 1, Carla
replaces it with a vehicle with a manufacturer’s list price of $32,000 that is leased for $475 per
month. Both vehicles are used exclusively for business purposes.
During July, 2018, Carla replaces some of the furniture in her office. The old furniture has a
capital cost of $18,000, while the new items cost $34,000. Carla receives a trade in allowance
for the old furniture of $6,000.
During September, 2018, Carla acquires a client list from an accountant who is retiring . The
cost of this list is $47,000.
During 2018, the various costs of operating her business, determined on an accrual basis, are
as follows:
Building Operating Costs $24,500
Costs Of Operating Leased Vehicle 7,200
Payments To Assistants 13,500
Miscellaneous Office Costs 3,750
Meals With Clients 4,200
Required: Calculate the minimum net business income Carla would include in her 2018
personal income tax return. In preparing your solution, ignore GST and PST implications.


(ITA 22 Accounts Receivable Election)
George Pentel is the owner of George’s Geodes, an unincorporated business that provides
distribution at the wholesale level of collectable mineral specimens. The business has a
December 31 year end.
While the business has been very successful, George would like to return to his first love,
research related to plate tectonics.
To accomplish this goal, he intends to sell George’s Geodes to an unrelated party, Ms. Molly
Stone. The transaction will take place on August 1, 2018 and will involve all of the assets of the
business. Ms. Stone does not anticipate incorporating the business and will continue to use
the December 31 year end.
On the date of the sale, the Accounts Receivable of the business have a face value of
$352,000. George and Molly agree that the current fair market value of these receivables is
$335,000. In 2017, George deducted a reserve for doubtful debts under ITA 20(1)(l) of
$12,000.
Between August 1, 2018 and December 31, 2018, $337,000 of the Accounts Receivable are
collected, with the remaining $15,000 being written off as uncollectible.
Both George and Molly have heard of an election under ITA 22 that may have some influence
on the tax treatment of the transfer of accounts receivable. They would like to have your
advice on this matter. George notes that he did not have any capital gains in the previous three
years. Further, he does not expect to have capital gains in 2018 or any subsequent year.
Required:
A. Indicate the tax effects, for both George Pentel and Molly Stone, of the disposition of the
accounts receivable and the subsequent 2018 collections and write-offs, assuming:
• that no election is made under ITA 22.
• that they make an election under ITA 22.
B. Indicate, from the point of view of each taxpayer, whether making the election would be a
desirable course of action.


(Comprehensive Case Covering Chapters 1 to 6)
Andrew Bank is 51 years old and lives with his common-law partner, John Bream. John is 49,
qualifies for the disability tax credit, and has 2018 income of $4,500.
They have two adopted children. Their 19 years old son Bart is dependent on Andrew
because he is disabled. However, the disability is not sufficient to qualify Bart for the disability
tax credit. Bart has 2018 income of $2,800. Because of his outstanding academic abilities,
their 15 year old son, Carl is attending university on a full time basis throughout 2018. Andrew
has paid his tuition fees of $17,000. As Carl has no income of his own, he has agreed to
transfer the maximum tuition credit to Andrew.
During 2018, Andrew paid for family medical expenses as follows:
Andrew $ 2,300
John 12,600
Bart 4,600
Carl 400
Total $19,900
Andrew is employed by Martin Inc., a Canadian public company. For 2018, his salary is
$123,000. In addition, he has commissions of $11,500. For the year ending December 31,
2018, his employer withholds the following amounts from his income.
RPP Contributions* $6,300
EI Premiums 858
Parking Fees At Employer’s Lot 600
*Andrew's employer makes a matching contribution of $6,300 to his RPP.
Andrew is required to use his own car for employment related travel, largely going to meet
with clients in their homes. His car was acquired on January 1, 2018 at a cost of $42,000.
During 2018, Andrew drove the car a total of 46,000 kilometers, of which 31,000 were
employment related. The remaining 15,000 kilometers involved personal use of the car. His
total operating costs for the year were $9,300. His employer provides him with an allowance
of $800 per month to reimburse him for the employment related use of his car.
Andrew's sales territory is large and during 2018, his employment related expenses were as
follows:
Hotels $ 8,500
Airline Tickets 4,500
Meals Alone While Travelling 2,000
Meals With Clients And Client Entertainment 8,600
Total $23,600
Mr. Andrew's employer does not reimburse him for any of these costs.
During 2018, Andrew received options to acquire 500 shares of Martin Inc. at a price of $23
per share. At that time, the shares were trading at $25 per share. Near the end of 2018,
Andrew exercises all of these options. At the time of exercise, the shares are trading at $28 per
share. He is still holding the shares at year end.
Several years ago, Andrew acquired an unincorporated business which he has continued to
operate through the current year. On January 1, 2018, the UCC balances for this business
were as follows:

Class 1 (Building Acquired In 2004) $472,200

Class 8 143,300
Class 50 12,500
Andrew uses tax based accounting for all of his revenues and expenses. He has correctly
calculated his net business income for tax purposes, prior to any CCA amounts, as $189,000.
Required: Calculate Andrew ’s 2018 Net Income For Tax Purposes, his 2018 Taxable
Income, and his minimum 2018 federal Tax Payable without consideration of any income tax
withheld by his employer. Ignore GST and PST considerations.

Mr. Martin Bowles is 43 years old and is employed by Dominion Brass, a large public company.
During 2018, his basic salary was $89,000. In addition, he earned $12,000 in commissions.
His employer withheld the following amounts from his income during 2018:

EI Premiums 858
Union Dues 430
Payments For Personal Use Of Company Car 1,200
*Mr. Bowles’ employer makes a matching contribution of $3,750 to his RPP.
His employer provides Mr. Bowles with a car which is leased at a rate of $459 per month, a
total of $5,508 for the year. During 2018, the car is driven 33,000 kilometres, of which
24,500 are related to his employment activities. The car was used by Mr. Bowles for 11
months during 2018. When he is not using the car, he is required to return it to the company's
garage.
Mr. Bowles is provided with an allowance of $400 per month to cover hotel and meal costs
during his employment related travel. Mr. Bowles’ actual costs for 2018 were as follows:
Hotels $2,850
Meals 1,875
It is the policy of Dominion Brass to reimburse tuition paid by employees when taking college
or university courses. During 2018, Mr. Bowles received reimbursements of $1,600 for two
courses. Of this total, $1,000 was for a two day marketing course, while $600 was for a
weekend course in art appreciation.
During 2018, Dominion Brass gave Mr. Bowles a $450 watch in recognition of his 10 years of
service with the company. In addition, all employees were given a $400 gift certificate for
purchases at a local department store.
In 2017, Mr. Bowles was granted options to purchase 1,500 shares of Dominion Brass stock at
a price of $52 per share. At that time, the shares were trading at $50 per share. In June, 2018,
when the shares are trading at $61 per share, Mr. Bowles exercises the options and immedi-
ately sells the resulting shares at that price.

On January 1, 2018, Mr. Bowles started a management consulting business located in an office
that he rents for $500 per month. In order to run his business effectively, he made improve-
ments to the office space that cost $12,000. His lease on the office terminates on December
31, 2020 and does not contain any renewal options.
Other information related to this business is as follows:
Revenues During 2018, Mr. Bowles issued invoices for his services totalling
$50,250.
Capital Expenditures Mr. Bowles spent $10,000 for furniture for his new office. In
addition, he purchased a computer for $1,150 and application software for $836.
Costs During 2018, the following costs were incurred in operating the management
consulting business:
Part Time Assistant $5,725

Office Supplies 347
Monthly Telephone Service 312
Cell Phone Charges (For Business Only) 211
Meals With Clients And Client Entertainment 3,150
As the rented office is in the same building complex as his home, Mr. Bowles makes no use of
his employer’s vehicle for operating this business.
Mr. Bowles is married and has two children:
Sally, Martin’s spouse, has 2018 income of $3,450.

Marie is 14 years old and has income of $2,300. All of this income resulted from the
investment of rewards that she has received for science projects.
Ellen is 19 years old and attends university on a full time basis for 8 months during
2018. Martin pays her tuition costs of $9,800. As Ellen has no income of her own, she
intends to transfer all of her education related tax credits to Martin.
The family ’s 2018 medical expenses, all paid for by Mr. Bowles, are as follows:
Martin $ 2,500
Sally 1,850
Marie 1,600
Ellen 6,540
Total $12,490
During 2018, Mr. Bowles makes donations to registered charities of $1,425, as well as contri-
butions to registered federal political parties in the amount of $275.
Required: Calculate Mr. Bowles’ 2018 Net Income For Tax Purposes, his 2018 Taxable

SSS Problem Six - 1

SSS Problem Six - 1

(Reserves)
Olaf Swensen owns an unincorporated business that delivers specialty food products to indi-
viduals and businesses. In 2018, his first year of operation, he had total delivered sales of
$215,000, of which $85,000 were on account. In addition, he received $14,500 in advances
from customers for products to be delivered in 2019. Olaf does not include advances in his
sales figures.
Being unincorporated, he chooses a taxation year that ends on December 31. On December
31, 2018, he had uncollected receivables of $42,000. He estimates that $4,000 of these
receivables will become uncollectible.
In 2019, Olaf's cash sales total $145,000 (not including advances from customers) and
account sales total $92,000. The $14,500 of 2018 orders for which advances were received
were all filled in 2019. During 2019, additional advances of $15,300 were received for deliv-
eries in 2020.
During 2019, Olaf needed to write off $4,300 of the December 31, 2018 receivables. On
December 31, 2019, the enterprise has uncollected receivables of $38,000. Olaf anticipates
that $4,500 of these receivables will be uncollectible.
The December 31, 2019 receivables contain a single large order for $12,000 of Olaf's prod-
ucts sold to a very important customer. Because of the size of this order, Olaf has agreed to
allow the customer to defer payment until January 1, 2020. The order was received on
September 1, 2019.
Required: How would the preceding information affect the calculation of Olaf Swensen’s
business income for the 2018 and 2019 taxation years? Include the full details of your calcula-
tions, not just the net result for each year.

SSS Problem Six - 2
SSS Problem Six - 2

(Valuation Of Business Inventories)
Holden’s Shirts began business on January 1 of the current year. Mike Holden, the owner of
the business, has always had an interest in high end clothing . Based on this interest, his busi-
ness involves purchasing shirts from exclusive manufacturers and reselling them at a
significant mark up. The business has a December 31 year end.
Purchases of shirts during the current year are as follows:
Date Quantity Price Total Cost
January 27 400 $120 $ 48,000
April 3 1,200 130 156,000
August 15 1,500 125 187,500
October 31 800 128 102,400
Totals 3,900 $493,900
On December 31, the end of the Company ’s taxation year, the inventory on hand amounts to
950 shirts. It is estimated that these units have a replacement cost of $126 per unit and a net
realizable value of $142 per unit.
Required: Calculate the various closing inventory values that could be used to determine
business income for tax purposes. Your answer should indicate the valuation method being
used, as well as the resulting value.

SSS Problem Six - 3
SSS Problem Six - 3

(Simple Business Income)
Swindex Inc. has a taxation year which ends on December 31. The condensed before tax
Income Statement for Swindex Inc. for the current year, prepared from information included
in its financial statements, is as follows:
Sales $3,000,000
Cost Of Sales ( 1,570,000)
Gross Margin $1,430,000
Other Expenses (Not Including Taxes) ( 755,000)
Operating Income Before Taxes $ 675,000
Other Income And Losses 275,000
Income Before Taxes $ 950,000
Other Information:
1. During the year, the Company spent $5,200 for landscaping its head office grounds. For
accounting purposes this was treated as a capital expenditure, but was not amortized
during the current year.
2. The Other Expenses (Not Including Taxes) account included the following amounts:
Bond Discount Amortization $ 500
Interest On Deficient Corporate Tax Instalments 1,700
Reserve For Future Inventory Declines 96,300
Interest Paid On Bonds Issued 22,000
Amortization Expense 36,500
Cost Of Advertising In Magazine Distributed Only In Jamaica 18,000
Charitable Donations 19,100
Cost Of Sponsoring Local Hockey Teams 3,200
Cost Of Advertising Circulars (One-Half Have Been Distributed) 15,000
3. The Other Income And Losses account contains the following items:
Damages Paid For Breach Of Contract $18,000
Loss From Theft 2,800
Cost Of Appraisal Of Property To Be Sold 3,800
4. Maximum CCA has been calculated to be $57,500 for the current year. The policy of the
Company is to deduct maximum CCA in each taxation year.
Required: Using the preceding information, calculate Swindex Incorporated’s Net Income
For Tax Purposes for the current year. In addition, provide reasons for any items that were
excluded from your calculations.

SSS Problem Six - 4
SSS Problem Six - 4

(Corporate Business Income With CCA)
For the taxation year ending December 31, 2018, Voxit Inc. recorded Net Income of
$565,000. This amount was determined by an inexperienced accountant who was promoted
when his supervisor suddenly quit.
Other Information:
1. The following items were deducted (added) during the year:
Current Income Tax Expense $210,000
Future Income Tax Benefit ( 23,000)
Interest Expense
(Includes $3,500 In Discount Amortization) 22,000
Interest On Deficient Corporate Tax Instalments 1,250
Reserve For Future Inventory Declines 12,600
Charitable Donations 14,500
Cost Of Sponsoring Local Soccer Team 4,600
Loss From Employee Theft 5,200
Loss On The Sale Of Vehicles 36,200
Cost Of Appraisal Of Building To Be Sold 2,600
2. On January 1, 2018, the Company has the following UCC balances:
Class 1 (All Assets Acquired in 2005) $325,236
Class 8 226,964
Class 10 87,468
Class 13 29,322
During the year ending December 31, 2018, the Company acquired furniture and fixtures
at a cost of $262,000. Furniture and fixtures with a cost of $275,000 and a fair market
value of $189,000 were traded in on the new assets.
The balance in Class 10 reflects the Company ’s fleet of delivery vehicles. In the
accounting records, their net book value was $92,700. During the year ending December
31, 2018, all of these vehicles were sold and replaced with leased vehicles. The sale
proceeds amounted to $56,500, with the amount received for each vehicle being less
than its cost.
The Class 13 assets relate to a lease that was signed on January 1, 2014. At that time, the
cost of the improvements on the leased property was $36,400. The basic term of the lease
is 10 years and there are two 4 year renewal options.
Prior to 2018, all the computer equipment was leased. During 2018, computer equip-
ment and systems software was purchased for $20,000.
3. On December 31, 2018, the Company acquired an unincorporated business. The
purchase price included a $55,000 payment for goodwill. As the acquisition was late in
the year, none of the acquired assets were amortized for accounting purposes.
Required: Calculate Voxit Inc.’s minimum Net Income For Tax Purposes for the year ending
December 31, 2018.

SSS Problem Six - 5
SSS Problem Six - 5

(ITA 22 Accounts Receivable Election)
Brownstone Enterprises is an unincorporated business that has operating successfully for a
number of years under the direction of its owner, Samuel Brownstone. However, after
receiving a large inheritance from his deceased father, he is in a position to sell the business
and retire. All of the assets of the business will be sold to Ms. Heidi Pilsner, an unrelated party.
Ms. Pilsner will continue to operate the business, using the same December 31 year end. At
this time, she has no plans to incorporate the business.
The assets change hands on July 2, 2018. With respect to the Accounts Receivable that are on
the books at that date, the following information is available:
Face Value $463,000
Realizable Value $427,000
Reserve Deducted In 2017 Taxation Year $ 31,000
Between July 2, 2018 and December 31, 2018, $433,000 of the Accounts Receivable are
collected, with the remaining $30,000 being written off as uncollectible.
Both Mr. Brownstone and Ms. Pilsner have heard of an election under ITA 22 that may have
some influence on the tax treatment of the transfer of accounts receivable. They would like to
have your advice on this matter. They will both have significant capital gains in 2018.
Required:
A. Indicate the tax effects, for both Mr. Brownstone and Ms. Pilsner, of the disposition of the
accounts receivable and the subsequent 2018 collections and write-offs, assuming:
• that no election is made under ITA 22.
• that they make an election under ITA 22.
B. Indicate, from the point of view of each taxpayer, whether making the election would be a
desirable course of action.

SSS Problem Six - 6
SSS Problem Six - 6

Mr. Allen Archer is employed by Global Inc., a Canadian public company. For 2018, his salary
is $56,000. In addition, his commissions for the year total $48,000. For the year ending
December 31, 2018, his employer withholds the following amounts from his income.
EI Premiums 858
Parking Fees At Employer’s Lot 600
*Mr. Archer’s employer makes a matching contribution of $4,200 to his RPP.
Mr. Archer’s employer requires him to use his own car for traveling to clients. The car that Mr.
Archer is currently using was acquired on January 1, 2018 at a cost of $28,500. During 2018,
Mr. Archer drove the car a total of 21,000 kilometers, of which 18,500 were employment
related. The other 2,500 kilometers involved personal use. His total operating costs for the
year were $3,750. Global Inc. provided an allowance of $500 per month to reimburse him for
the use of the car.
His employment related travel did not require overnight stays and, as a consequence, he has
no hotel expenses. However, he spent $7,200 during 2018 on meals and entertainment for
clients. These amounts were fully reimbursed by his employer.
Mr. Archer’s employer granted him options to acquire 1,000 shares of the Global Inc. stock for
$12 per share a year ago. At the time the options were granted, the Global Inc. shares were
trading at $10 per share. During 2018, Mr. Archer exercises the options. At the time of exer-
cise, the Global Inc. shares were trading at $18.25 per share. He is still holding the shares at
Mr. Archer has a spouse and two children. During 2018, his spouse, Jan, had Net Income For
Tax Purposes of $7,500. His 22 year old son, Ron, is dependent on Mr. Archer because he is
disabled. However, the disability is not severe enough to create a marked restriction in his
daily activities. Ron has no income during 2018. His 18 year old daughter, Mona, was in full
time attendance at a Canadian university for 8 months during 2018. While she has 2018 Net
Income For Tax Purposes of $4,750, Mr. Archer paid her tuition fees of $9,200. Mona has
agreed to transfer her tuition tax credit to Mr. Archer.
During 2018, Mr. Archer paid medical expenses as follows:
Allen $ 3,780
Jan 2,000
Ron 6,400
Mona 1,500
Total $13,680
Because of his interest in antiques, Mr. Archer opened a retail operation to sell antiques on
January 1, 2018. Mr. Archer invests $239,000 of his savings in this unincorporated business.
Of this amount $183,000 was used to purchase a new store building , with the remaining
$56,000 invested in fixtures for the store. He estimates that $42,000 of the $183,000 paid for
the store represents the value of the land. The business is called Allen’s Oldies and, as the
retail operation is only a few blocks from his residence, Mr. Archer makes no use of his car in
this business.

SSS Problem Six - 6
As Mr. Archer has had no formal training as an accountant, he keeps the records for Allen’s
Oldies on a cash basis. As at December 31, 2018, the business had accumulated total cash of
$32,800. Mr. Archer’s informal records indicate that at December 31, 2018, the business had
receivables from customers of $2,600, inventories with a cost of $12,600, and liabilities to
suppliers of $5,750. The business had no other debt obligations on this date.
Required: Calculate Mr. Archer’s 2018 Net Income For Tax Purposes, his 2018 Taxable

SSS Solution Six - 1

The results for the 2 years would be as follows:
2018 2019
Cash Sales ($215,000 - $85,000) $130,000
Cash Sales (Given) $145,000
Sales On Account 85,000 92,000
Advances From Customers 14,500 15,300

Reserve For Undelivered Merchandise:
Add Prior Year Reserve Nil 14,500
Deduct Current Year Reserve ( 14,500) ( 15,300)
Reserve For Doubtful Debts:

Add Prior Year Reserve Nil 4,000
Deduct Current Year Reserve ( 4,000) ( 4,500)
Deduct Actual Write-Offs Nil ( 4,300)
Reserve For Unpaid Amounts (See Note) N/A Nil

Net Effect $211,000 $246,700
Note: In order to deduct a reserve for unpaid amounts on sales that are not of land, some
part of the proceeds must be due more than two years after the date of the related sale. In
this case, the proceeds are due 4 months after the sale and, as a consequence, no reserve
for unpaid amounts can be deducted.


Valuation Basis
For tax purposes, the Company can use either fair market value or lower of cost and market.
The inventory rules under GAAP are more restrictive as inventories must be measured using
the lower of cost and net realizable value.
Market Determination - Two Possible Values

For tax purposes, the Company can measure market using either replacement cost or net real-
izable value. These values would be as follows:
Replacement Cost [($126)(950)] $119,700
Net Realizable Value [($142)(950)] $134,900
While it is not an acceptable practice under GAAP, the CRA will accept the use of market
values, without regard to their relationship to cost.
Cost Determination
In the determination of cost, taxpayers are permitted to use specific identification (this would
not appear to be practical here), a First In, First Out (FIFO) assumption, or Average Cost.
Using the First In, First Out method, the appropriate value for the ending inventory would be
determined as follows:
800 Units At $128 $102,400

150 Units At $125 18,750
950 Units At FIFO Cost $121,150
Based on average cost, the ending inventory value would be calculated as follows:
Number Of Units 950

Average Cost [($493,900 ÷ 3,900)] 126.64
950 Units At Average Cost $120,308
Lower Of Cost And Market - Four Possible Values

For tax purposes, the possible values here would be as follows:
Lower Of Replacement Cost And FIFO Cost $119,700

Lower Of Replacement Cost And Average Cost 119,700
Lower Of Net Realizable Value And FIFO Cost 121,150
Lower Of Net Realizable Value And Average Cost 120,308
For accounting purposes, only the last two values would be acceptable.


The Net Income For Tax Purposes of Swindex Inc. for the year would be calculated as follows:
Accounting Income Before Taxes $ 950,000

Additions:
Bond Discount Amortization $ 500
Interest On Tax Instalments 1,700
Reserve For Future Inventory Declines
(Note 1) 96,300
Charitable Donations (Note 2) 19,100
Prepaid Advertising [(1/2)($15,000)] 7,500
Appraisal Fees (Note 3) 3,800 165,400
$1,115,400
Deduction:
Landscaping Costs ( 5,200)
CCA ( 57,500)
Net Income For Tax Purposes $1,052,700
Note 1 Only those reserves that are specified in the Income Tax Act can be deducted
for tax purposes. Reserve for inventory declines is not listed.
Note 2 The corporate charitable donations can be deducted in the calculation of

Taxable Income, but are not deductible in the calculation of Net Income For Tax
Purposes.
Note 3 While the problem states that this item was deducted in the calculation of
accounting income, this would not be in compliance with generally accepted
accounting principles. Generally accepted accounting principles would require that
the appraisal costs on the property to be sold be added to the cost of the relevant prop-
erty. Regardless of the treatment accorded to this item in the accounting records of
Swindex, it is clear that it could not be deducted for tax purposes. These costs will be
added to the adjusted cost base of the property and serve to reduce any gain (increase
any loss) resulting from the sale of the property.
Other Items Further explanation related to the items not included in the preceding calcula-
tion of Net Income For Tax Purposes is as follows:
Bond Interest The interest would be deductible as the bonds are a liability of the
business.
Foreign Advertising Advertising in foreign periodicals is fully deductible provided

the advertising is not directed at Canadians. Since the periodical is not distributed in
Canada, these expenses would be deductible.
Hockey Sponsorship This would be deductible as a promotional expense.
Damages As the damages relate to a transaction that produces business income,

they are considered a business expense.
Loss From Theft Losses of this type, unless they result from the activity of senior
officers, are considered to be deductible as a normal cost of doing business.


The Net Income For Tax Purposes of Voxit Inc., would be calculated as follows:
Accounting Income $565,000
Additions:
Current Income Tax Expense $210,000
Bond Discount Amortization 3,500
Interest On Tax Instalments 1,250
Reserve For Future Inventory
Declines (Note 1) 12,600
Charitable Donations (Note 2) 14,500
Loss On The Sale Of Vehicles
($92,700 - $56,500) 36,200
Appraisal Fees (Note 3) 2,600 332,150
Subtotal $897,150
Deductions:
Future Income Tax Benefit ($ 23,000)
CCA (Note 4) ( 75,229)
Terminal Loss On Class 10 ( 30,968) ( 129,197)
Note 1 Reserves are used in accounting statements to reflect anticipated future

events. Such amounts are not deductible for tax purposes.
Note 2 The corporate charitable donations can be deducted in the calculation of

Taxable Income, but are not deductible in the calculation of Net Income For Tax
Purposes.
Note 3 Generally accepted accounting principles would require that the appraisal
costs on the property to be sold be added to the cost of the relevant property. Regard-
less of the treatment accorded to this item in the accounting records of Voxit, it is clear
that it could not be deducted for tax purposes and would be added to Class 1.
Note 4 The required CCA calculations would be as follows:

Class 1
Class 1 Opening Balance $325,236
Additions - Appraisal Cost 2,600
One-Half Net Addition ( 1,300)
CCA Base $326,536
Rate 4%
Class 1 CCA $ 13,061

Class 8
Additions $262,000
Disposal - Lesser Of:
• Proceeds = $189,000
• Cost = $275,000 ( 189,000) 73,000
One-Half Net Addition ( 36,500)
CCA Base $263,464
Rate 20%
Class 8 CCA $ 52,693
Class 10
Dispositions - Lesser Of
• Capital Cost (Not Given)
• Proceeds = $56,500 ( 56,500)
Ending Balance With No Remaining Assets = Terminal Loss $30,968
The cost of each individual vehicle was not provided in the problem. However, the
problem did state that no vehicle had proceeds of disposition that was greater than its
cost. Given this, the capital cost is not required.
Class 14.1
The CCA calculation for this Class would be as follows:
Class 14.1 UCC Opening Balance Nil
Acquisition Of Goodwill $55,000
One-Half Net Additions ( 27,500)
CCA Base $27,500
Rate 5%
Class 14.1 CCA $ 1,375
Total CCA
The total CCA deductible would be as follows:

Class 1 (Preceding Calculation) $13,061
Class 8 (Preceding Calculation) 52,693
Class 10 (Terminal Loss) Nil
Class 13 ($36,400 ¸ 14) 2,600
Class 14.1 (Preceding Calculation) 1,375
Class 50 [(1/2)(55%)($20,000)] 5,500
Total CCA $75,229
Note that the January 1 Class 13 balance shows that less than the maximum CCA for
this class has been claimed in the past.
Notes On Excluded Items
• The cost of sponsoring the local soccer team is deductible for both tax and accounting
purposes.
• The cost of theft by employees who are not officers of the Company is deductible.


Part A - No Election
If the ITA 22 election is not made, the tax consequences for Mr. Brownstone would be as
follows:
Add: 2017 Reserve For Doubtful Debts $31,000
Deduct Capital Loss:
Proceeds Of Disposition $427,000
Adjusted Cost Base ( 463,000)
Capital Loss ($ 36,000)
Non-Deductible One-Half 18,000 ( 18,000)
2018 Income Inclusion $13,000
Note that the $18,000 allowable capital loss can only be deducted to the extent of Mr. Brown-
stone’s taxable capital gains. In the absence of such capital gains, the income inclusion would
have been $31,000.
If the ITA 22 election is not made, the tax consequences to Ms. Pilsner would be as follows:
Proceeds Of Disposition (Amount Collected) $433,000
Capital Gain $ 6,000
Non-Taxable One-Half ( 3,000)
2018 Income Inclusion $ 3,000
Part A - Election
If the ITA 22 election is made, the tax consequences for Mr. Brownstone would be as follows:
Add: 2017 Reserve For Doubtful Debts $31,000
Deduct: Business Loss ($463,000 - $427,000) ( 36,000)
2018 Deduction From Income ($ 5,000)
If the ITA 22 election is made, the tax consequences to Ms. Pilsner would be as follows:
Add: Face Value - Price Paid ($463,000 - $427,000) $36,000
Deduct: Actual Write-Offs ($463,000 - $433,000) ( 30,000)
2018 Income Inclusion $ 6,000
Part B
For Mr. Brownstone, the ITA 22 election is clearly desirable, converting a $13,000 income
inclusion into a $5,000 deduction.
For Ms. Pilsner, the fact that actual collections ($433,000) exceed the estimated value of the
Accounts Receivable on the date of the sale ($427,000), means that the ITA 22 election would
not be desirable. It would double her income inclusion from $3,000 to $6,000.


Net Employment Income
The required calculations here are as follows:
Salary $ 56,000
Additions
Commissions 48,000
Car Allowance [($500)(12)] 6,000
Stock Option Benefit [($18.25 - $12.00)(1,000)] 6,250
Deductions
RPP Contributions ( 4,200)
Car Operating Costs [($3,750)(18,500 ÷ 21,000)] ( 3,304)
Car CCA [($28,500)(30%)(1/2)(18,500 ÷ 21,000)] ( 3,766)
Since the meals and entertainment expenses were fully reimbursed by his employer,
they have no effect on Mr. Archer’s employment income. As it is not deductible for tax
purposes, the amount withheld for parking has no effect on Mr. Archer’s employment
income.
Net Business Income

Cash Basis Income (Given) $32,800
December 31 Receivables 2,600
December 31 Inventories 12,600
December 31 Payables ( 5,750)
CCA On Building [($183,000 - $42,000)(6%)(1/2)]* ( 4,230)
CCA On Furniture And Fixtures [($56,000)(20%)(1/2)] ( 5,600)
Net Business Income $32,420
*It would appear that the new building will be used exclusively for non-residential
purposes. Given this it will be eligible for the 6 percent CCA rate, provided that it is
kept in a separate Class 1.
Net Income For Tax Purposes

The required calculation here is as follows:
Net Business Income 32,420
Taxable Income
The required calculation is as follows:
Stock Option Deduction [($6,250)(1/2)] ( 3,125)

Tax Payable
Tax On First $93,208 $16,544
Tax Before Credits $27,221
Tax Credits:
Basic Personal Amount (Mr. Archer) ($11,809)
Spouse ($11,809 - $7,500) ( 4,309)
Canada Caregiver - Ron ( 6,986)
EI ( 858)
CPP ( 2,594)
Transfer Of Tuition - Lesser Of:
• Absolute Limit Of $5,000
• Actual Tuition Of $9,200 ( 5,000)
Medical Expenses (Note) ( 11,235)
Total Credit Base ($43,986)
Rate 15% ( 6,598)
Note The medical expense credit base would be calculated as follows:

Medical Expenses For Allen And Jan
($3,780 + $2,000) $ 5,780
• [(3%)($137,400)] = $4,122
Balance Before Dependants 18 And Over $ 3,478
Ron’s Medical Expenses $6,400
• $2,302
• [(3%)(Nil)] = Nil Nil 6,400
Mona’s Medical Expenses $1,500

• $2,302
• [(3%)($4,750)] = $143 ( 143) 1,357

Self Study Problem Seven - 1

(Interest Deductibility - 4 Cases)
Each of the following independent Cases involves the payment of interest and the issue of
whether the interest will be deductible for tax purposes.
Case A John Artho owns 1,000 shares of Bee Ltd., a publicly traded company. He also owns
a personal use condominium that was financed with borrowed money. Mr. Artho sells the
1,000 shares of Bee Ltd. and uses the proceeds to pay down the mortgage on the condo-
minium. He subsequently borrows money to acquire another 1,000 shares of Bee Ltd. Would
the interest on the new loan be deductible? Explain your conclusion.
Case B Meridee Burns borrows $225,000 and acquires an income producing property for
$225,000. She subsequently sells the property for $275,000 and, without repaying the funds
borrowed to acquire the first property, uses the proceeds to acquire two other properties. The
cost of property A is $50,000, while the cost of property B is $225,000. How will the
$225,000 in borrowing be linked to the two new properties?
Case C Meridee Burns borrows $225,000 and acquires an income producing property for
$225,000. She subsequently sells the property for $190,000 and, without repaying the funds
borrowed to acquire the first property, uses the proceeds to acquire two other properties. The
cost of property A is $60,000, while the cost of property B is $130,000. How will the
$225,000 in borrowing be linked to the two new properties?
Case D Jason Bridges borrows $320,000 and invests the entire amount in the shares of Loser
Inc. Six months later, he sells these shares for $175,000. The proceeds of the sale are used to
pay off $175,000 of the loan, leaving an ongoing balance of $145,000. Can he continue to
deduct the interest payments on this $145,000 balance? Explain your conclusion.


(Rental Income)
Ms. Serravalle has a firm belief in the advantages of investing in real estate. Because of this
belief, she has invested most of her discretionary income in residential rental properties over
the past four decades. On January 1, 2018, she owns four rental properties The relevant facts
on these properties are as follows:
642 Kent Street This is a Class 3 building that has a capital cost of $722,000. Its
UCC at the beginning of the year was $412,000. During the year, it generated rents of
$63,000 and incurred property taxes of $7,800, interest charges of $11,700, and
other expenses (excluding CCA) of $12,750.
1256 Montreal Road This is a Class 3 building that had a capital cost of $37,000. It
was sold on August 1. For CCA purposes, it was included in the same Class 3 pool as
112 Lisgar Avenue. Of the sale proceeds, $65,000 was allocated to the building .
From January 1 to July 31, the building generated rents of $4,800 and incurred prop-
erty taxes of $1,100, interest charges of $1,450, and other expenses (excluding CCA)
of $900.
This property contained furniture that Ms. Serravalle had acquired at a cost of $8,000.
On January 1, 2018, this furniture had a UCC balance of $4,200. It was sold at the
same time as the rental property. The proceeds of the furniture sale were $2,100.
112 Lisgar Avenue This is a Class 3 building that has a capital cost of $45,000. At
the beginning of the year, the UCC of the Class 3 pool, which included both 1256
Montreal Road and 112 Lisgar Avenue, was $48,000. During the year, it generated
rents of $5,000 and incurred property taxes of $1,550, interest charges of $650, and
23 Durham Private This Class 1 building has a capital cost of $225,000. Its UCC at
the beginning of the year was $216,000. During the year, the unit generated rents of
$22,000 and incurred property taxes of $3,850, interest charges of $11,500, and
Required: Calculate Ms. Serravalle’s net rental income for 2018. You should provide a
separate calculation for each property. Specify how much CCA should be taken for each
building .


(Dividend vs. Interest Income)
Sarah, Sally, and Suzanne Baxter are three sisters who live in the same province. Because of
their alternative career choices, they have enjoyed varying degrees of economic success.
Sarah Sarah has devoted her life to the arts. However, the scarcity of work in her
field has resulted in her being in the 15 percent federal tax bracket and the 5 percent
provincial bracket.
Sally Sally has always worked in retail and is doing well as a store manager. She is in
the 26 percent federal tax bracket and the 11 percent provincial tax bracket.
Suzanne Suzanne is a very successful attorney. Her income places her in the 33
percent federal tax bracket and the 16 percent provincial tax bracket.
The provincial dividend tax credit on eligible dividends is equal to 27 percent of the dividend
gross up.
On January 1 of the current year, as the result of an inheritance from a distant uncle, each of
the sisters has $15,000 to invest. They are looking at the following alternatives:
Corporate Bonds The issue that they are considering has a 4.5 percent coupon
rate, is selling at par, and matures in 25 years.
Preferred Stock The shares that they are considering has a dividend yield of 5.6
percent. The eligible dividend is cumulative but not participating .
The income from these investments would not move any of the three sisters to a higher federal
or provincial tax bracket. Each sister has sufficient income to use all of her available tax
credits.
Required: Advise each of the Baxter 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 $15,000 in:
A. The corporate bonds.
B. The preferred stock.


(Property Income - Alternative Investments)
On January 1, 2018, Ms. Joan Bagley has $650,000 in a bank account. While the account has
great flexibility in terms of deposits and withdrawals, it pays interest at an annual rate of only 1
percent. She would like to retain $50,000 of this balance as a contingency fund, while
investing the $600,000 balance for a year. After consulting with her financial advisor, she is
considering the following investment alternatives:
• A $600,000 guaranteed investment certificate that will mature on December 31,
2018. The certificate will pay annual interest at a rate of 4.5 percent on December 31.
• Preferred shares of a Canadian public company with a stated value of $600,000.
These shares pay an annual eligible dividend of 5.25 percent on December 15. Ms.
Bagley anticipates selling these shares on December 31, 2018 for their stated value.
• Shares of a public high tech company at a cost of $600,000. While these shares do not
pay dividends, Ms. Bagley anticipates selling these shares on December 31, 2018 for
$675,000.
Ms. Bagley has sufficient employment income that she is in the 29 percent federal tax bracket
and the 12 percent provincial tax bracket. The provincial dividend tax credit on eligible divi-
dends is equal to 28 percent of the gross up.
Assume the preferred and common shares can be sold at the anticipated values on December
31, 2018.
Required: For each investment alternative, determine the after tax return that Ms. Bagley
will earn during the year ending December 31, 2018.


(Property Income - Alternative Investments)
During December, 2017, Ms. Holmes reaches a settlement with her former husband that
requires him to make a lump sum payment to her of $100,000 on January 1, 2018. While Ms.
Holmes has no immediate need for the funds, she will require them on January 1, 2019 in
order to finance a new business venture that she plans to launch. As a consequence, she
would like to invest the funds for the year ending December 31, 2018. She is considering the
following alternatives:
• Investment of the full $100,000 in a one year, guaranteed investment certificate that
pays annual interest of 5.5 percent.
• Investment of the full $100,000 in the shares of Norton Ltd., a publicly traded Cana-
dian company. Ms. Holmes expects that the Company will pay eligible dividends on
these shares during 2018 of $5,000. She anticipates that by the end of 2018, the
shares will be worth at least $106,000.
• Investment of the full $100,000 in a rental property with a cost of $165,000. The
property currently has a tenant whose lease calls for rental payments during 2018 of
$13,200. Cash expenses for the year (interest, taxes, and condominium fees) are
expected to be $9,600. Of the total cost of $165,000, an amount of $15,000 can be
allocated to the land on which the building is situated. Ms. Holmes believes that the
property can be sold on December 31, 2018, to net her $175,000.
Ms. Holmes expects to have employment income in excess of $250,000 during 2018. Her
provincial tax rate on any additional income is 18 percent, while the provincial dividend tax
credit on eligible dividends is equal to 27 percent of the gross up.
Required: Write a brief memorandum providing investment advice to Ms. Holmes on the
three alternatives.


(Business And Property Income)
Mrs. Norton is a lawyer who specializes in real estate. She has a well established practice
located in Regina. During the taxation year ending December 31, 2018, she had professional
fees of $169,500 and operating expenses associated with running her practice of $42,800. In
addition to these operating expenses, Mrs. Norton spent $1,500 for accommodations and
seminar fees attending a convention in Saskatoon, and $5,400 in travel costs (air fare, accom-
modations, and 50 percent of meals) attending a convention in Singapore on doing business in
Asia.
In addition to her professional income, Mrs. Norton received $1,000 in eligible dividends
from a Canadian public company and $1,250 in interest on Canada Savings Bonds. Mrs.
Norton also owns a rental property that generated revenues of $12,000 and incurred cash
expenses of $8,000. The UCC of this property at the beginning of 2018 was $300,000 and it is
subject to CCA at a rate of 4 percent.
Required: Determine Mrs. Norton’s minimum Net Income For Tax Purposes for the year
ending December 31, 2018. Ignore GST/HST/PST considerations and the need to make CPP
contributions by Ms. Norton.


(Foreign Property Income, Income Trusts And Mutual Funds)
Late in 2017, Ms. Betty Tang sells her Vancouver residence for $800,000. It is her intention to
not replace this property and, in future years, she plans to rent a unit in a downtown condo-
minium building .
On January 1, 2018, she invests the proceeds from the sale as follows:
Foreign Term Deposit She acquires a U.K. Pound Sterling (£) term deposit with a
maturity value of £200,000 at a Canadian dollar cost of $360,000. Assume that
throughout 2018, £1 = $1.70.
Income Trust Units She acquires 8,000 units of the B&B real estate investment
trust. The units are acquired at a cost of $30 per unit.
Common Shares She acquires 2,000 shares of Liberty Inc., a publicly traded
company, at a total cost of $100,000.
Mutual Fund Units She acquires 2,500 units of Temple Small Cap, a mutual fund
trust. The cost is $40 per unit.
The following transactions occur during the year ending December 31, 2018:
Foreign Term Deposit On December 31, 2018, annual interest is paid at the rate of
7 percent. The U.K. authorities withhold 25 percent of this amount, with the
remainder being remitted to Betty.
B&B Trust Units The trust has a distribution of $1.50 per unit. Of this total $0.50
represents a return of capital, with the remainder being property income. Betty
invests the entire distribution in additional units at a cost of $52 per unit.
Liberty Inc. The Liberty Inc. shares pay an eligible dividend of $1.60 per share.
Temple Small Cap The trust has a distribution of $2.40 per unit. All of this distribu-
tion is reinvested to acquire additional Temple units at $38 per unit. The composition
of the distribution is as follows:
Capital Gains $0.40
Eligible Dividends 1.00
Interest 1.00
Total Per Unit $2.40
Betty has other investment income that places her in the 29 percent federal tax bracket. Taxes
on this income are sufficient to use all of her available tax credits before considering the
effects of the investments described above. She lives in a province where the maximum rate is
16 percent and the dividend tax credit on eligible dividends is 30 percent of the gross up.
Required: Calculate the amount of Taxable Income and Tax Payable that will result from the
described distributions. In addition, indicate the per unit adjusted cost base for each of the
two trust units on December 31, 2018. Ignore any tax implications resulting from the
Canada/U.K. tax treaty.


Ms. Caroline Graham is a full time employee of KLY Incorporated, an on-line clothing retailer.
She has an annual salary of $75,000, from which the following amounts were withheld in
2018:
EI Premiums 858
Annual Donation to United Way 1,500
Long term disability insurance 500
The long term disability plan provides periodic benefits that compensate for lost employment
income. In addition, Caroline’s employer provided her with a life insurance policy at a cost of
$350.
Caroline is a single parent with a 15-year-old daughter, Grace, who has no income of her own.
Caroline’s father lives with the family, and is financially dependent on Caroline as his only
income is Old Age Security of $7,000. He enjoys good physical and mental health. Caroline’s
father moved in with her after her mother passed away in 2017, and as a result, in January,
2018, Caroline purchased a home for the family to live in for $350,000. Caroline and Grace
had lived in a rented home for the past 6 years.
Caroline provides financial support to her sister, Kristin. Kristin has lived in France for the last
10 years. She has been in university there for the last 2 years. Caroline paid her university
tuition of $15,000 for 2018 and $12,000 for medical costs related to her hospitalization after
an automobile accident in March, 2018.
Caroline has provided the following information regarding the 2018 income from her invest-
ment portfolio.
Term Deposits Caroline has the following two term deposits:
• A $200,000 term deposit purchased on November 1, 2017 at 3.25 percent.
Interest is payable at maturity on October 31, 2019.
• A $20,000 term deposit purchased on November 30, 2018 at 3 percent. Interest
is payable at maturity in 6 months.
Investments In Shares The income amounts from Caroline's share investments are
as follows:
• Caroline owns 1,000 shares of Royal Scotia Bank. The company paid an eligible
dividend of $24 per share on October 15, 2018.
• Caroline also owns 100 shares in Graham Company Limited, a corporation solely
owned and operated by her brother. This company paid a non-eligible dividend
of $50 per share on November 30, 2018.
• Caroline inherited 500 shares of Americo Limited, a U.S. company from her
mother. In 2018, these shares paid a dividend of $2 (Canadian) per share. The
U.S. government withheld 12 percent of the total dividend amount.
Future Investments When Caroline’s mother passed away, she left Caroline with a
substantial sum of money which Caroline wants to invest wisely. She is planning to
invest substantial funds in 2018 in one of the three following alternatives:
• term deposits,
• shares in public Canadian corporations which will pay eligible dividends, or
• additional shares in her brother's corporation which will pay non-eligible
dividends.

Caroline had owned a rental property for several years, and when she received her inheri-
tance, she sold the old property and purchased a new one.
The old rental property cost $125,000 when it was purchased, with $28,000 allocated to the
land, and $2,500 allocated to appliances. UCC on this property was $90,450 on January 1,
2018 for the building and $2,145 for the appliances. The property was sold on January 1,
2018 for $120,000 with $28,000 allocated to the land and $1,000 to the appliances.
The new property was purchased on February 1, 2018, and cost a total of $200,000, with
$45,000 allocated to land. Caroline also purchased the on-site appliances for $6,500.
Caroline rented the property from March 1 to November 30 and collected rent during this
period of $16,150. Costs to operate the property, including mortgage interest, insurance, util-
ities and property taxes totaled $12,500.
In order to increase the future rent, during December, 2018, Caroline spent the following
amounts on the property:
New windows $14,500
Roof repairs 1,200
Carpeting and flooring replacements 7,500
Cleaning 500
Painting interior and exterior 2,000
Required:
A. For the 2018 taxation year, calculate Caroline’s minimum:
1. Net Income For Tax Purposes,
2. Taxable Income,
3. Federal Tax Liability.
B. Based on the top marginal tax rate applied to determine Caroline’s tax payable, calculate
the effective federal tax rate that Caroline pays on eligible dividends, non-eligible divi-
dends and interest income (ignore provincial taxes). What advice would you give her with
respect to her investment choices?
In completing the requirements of this problem, ignore GST, PST and HST considerations.


Mr. Derek Fontaine is married and has three children. His wife, Emily, works as a personal
fitness trainer on a part time basis and, for 2018, her Net Income For Tax Purposes is $9,500.
His two youngest children, Brad and Barbara are twins. They are 14 years old and, unfortu-
nately, Brad has been blind since birth. Neither child has any income of their own.
His other son, Bill, is 19 years old and attends university on a full time basis for 10 months of
the year. His tuition fees total $8,500. Bill has income from part time jobs of $10,000 during
2018. Bill has agreed to transfer the maximum amount of the tuition credit to his father.
Eligible medical expenses for Derek’s family, all of which were paid by Derek, are as follows:
Derek $ 1,400
Emily 1,600
Brad (No attendant care included) 11,400
Barbara 2,300
Bill 4,600
The Fontaines had always lived in rented premises. However, because the current level of
mortgage rates makes purchasing a home attractive, they purchase a residence at a cost of
$625,000. They move in on September 1, 2018.
Derek has a management consulting business that he operates out of a building that he owns.
For the taxation year ending December 31, 2018, the business has an accounting Net Income
of $211,000. Other information about this business is as follows:
1. Expenses include $11,500 in business meals and entertainment.
2. Derek owns a car which is used in the business. It was purchased on January 1, 2018
for $46,000. Operating costs for 2018 totaled $4,800. All of these costs were
deducted in determining the accounting Net Income of the business. During this
year, the car was driven 32,000 kilometers of which 23,000 related to Derek’s busi-
ness activities.
3. The building that is used in the business is a new building that was purchased in 2016.
It has a January 1, 2018 UCC of $450,000. Derek’s business uses 100 percent of the
space in the building. The furniture and fixtures in the building have a January 1, 2018
UCC of $42,000. During 2018, additional furniture was acquired at a cost of
$12,000. It replaced furniture that had cost $10,000. Derek sold the used furniture
for $3,000.
4. Amortization of $18,000 was deducted in determining accounting Net Income. This
included amortization on the car, the furniture and fixtures, and the building.
In addition to operating his business, Derek has been an active investor in various types of
securities. Information on his holdings is as follows:
Breax Common Shares On January 1, 2018, Derek holds 2,500 shares of this
Company. They have an adjusted cost base of $130,000. On February 1, 2018, he
sells 1,000 of these shares for $65 per share. On July 1, 2018, he acquires an addi-
tional 1,200 shares at $54 per share. During 2018 he receives eligible dividends on
these shares totalling $8,000.
Realco Income Trust On January 1, 2018, Derek holds 5,000 units of this income
trust. The adjusted cost base of these units is $150,000. During 2018, these units
have a distribution of $2.50 per unit. Of this total, $1.00 represents a return of
capital, with the other $1.50 consisting of property income. Derek uses the entire
distribution to acquire additional units in the trust at $32 per unit.

Debt Security On July 1, 2017, Derek purchases a debt security with a maturity
value of $100,000. The security matures on June 30, 2022 and bears interest at 8
percent per annum. Interest for the first 18 months is paid on December 31, 2018,
with the remaining interest due when the security matures on June 30, 2022.
Foreign Term Deposit On January 1, 2018, Derek owns a foreign currency term
deposit with a maturity value of $250,000. During the year, the term deposit earns
interest of $20,000. Taxation authorities in the foreign jurisdiction withhold $8,000
of this amount. All amounts are in Canadian dollars.
Required: Calculate Mr. Fontaine’s 2018 minimum Net Income For Tax Purposes, his 2018
minimum Taxable Income, and his 2018 minimum federal Tax Payable. Ignore GST/HST/PST
considerations and the need to make CPP contributions by Derek and Emily.

SSS Problem Seven - 1


(Interest Deductibility - 4 Cases)
Each of the following independent Cases involves the payment of interest and the issue of
whether the interest will be deductible for tax purposes.
Case A Martin Duck borrows $300,000 and invests the entire proceeds of the loan
in publicly traded securities. After 3 months, the value of the securities has fallen to
$110,000. At this point, Mr. Duck sells the securities and uses the proceeds to reduce
the loan to $190,000.
Now that he no longer owns the securities, can he still deduct the interest on the loan?
Explain your conclusion.
Case B Janet Forest owns a portfolio of securities with a current value of $190,000.
Using her margin balance available from her stockbroker, she borrows $30,000 to
finance the purchase of a sailboat. During the period the margin loan is outstanding ,
she pays interest of $900.
Can she deduct this interest against the $5,000 in income earned during this period
on her portfolio of securities? Explain your conclusion.
Case C Martin Brock borrows $42,000 and uses the funds to acquire an income
producing property. He later sells the property for $110,000. He uses these proceeds
to purchase two properties. Property A costs $45,000 and property B costs $65,000.
How will the $42,000 in borrowing be linked to the two properties?
Case D Chuck Masters borrows $100,000 and uses the funds to acquire an income
producing property. He later sells the property for $80,000. He uses the $80,000 to
purchase two properties. Property A costs $20,000 and property B costs $60,000.
How will the $100,000 in borrowing be linked to the two properties?


(Rental Income)
In the past few years, Mr. Stanton has invested his excess funds in various residential rental
properties in Windsor. Given the economic situation in the city at the time, he was able to
purchase several foreclosed properties at very low prices. At the beginning of 2018, he owned
four properties, as well as some furnishings used in one of the older buildings.
The relevant information on these rental properties for 2018 is as follows:
Furniture The furniture was used in the building at 18 Prince Street. It had a capital
cost of $15,000, a UCC of $8,000 at the beginning of the year, and was sold during the
year for $5,000.
18 Prince Street This building had a capital cost of $42,000. It was sold on August 1.
For CCA purposes, it was included in the same Class 1 pool as 4 McManus Street. Of
the sale proceeds, $60,000 was allocated to the building . From January 1 to July 31,
the building generated rents of $6,000 and incurred property taxes of $1,200,
interest charges of $1,750, and other expenses (excluding CCA) of $1,000.
4 McManus Street This building has a capital cost of $45,000. At the beginning of
the year, the UCC of this Class 1 pool, which included both 4 McManus Street and 18
Prince Street, was $50,000. During the year, it generated rents of $5,000 and
incurred property taxes of $1,550, interest charges of $650, and other expenses
(excluding CCA) of $2,500.
94 George Street This building has a capital cost of $650,000. Its UCC at the begin-
ning of the year was $550,000. During the year, it generated rents of $42,000 and
incurred property taxes of $5,200, interest charges of $7,800, and other expenses
(excluding CCA) of $8,500.
125 West Street This building has a capital cost of $102,000. Its UCC at the begin-
ning of the year was $98,000. During the year, the unit generated rents of $10,000
and incurred property taxes of $1,750, interest charges of $5,000, and other
expenses (excluding CCA) of $4,000.
Within the next year, Mr. Stanton expects to sell 4 McManus and 125 West for double what he
paid for the properties.
Required: Calculate Mr. Stanton’s net rental income for 2018. You should provide a sepa-
rate calculation for each property. Specify how much CCA should be taken for each building .


(Dividend vs. Interest Income)
Bill Martin, Dave Martin, and Charles Martin are three brothers living in the same province.
They each have $20,000 that they wish to invest. Because of differences in their current
employment situations, they are in different tax brackets. These brackets are as follows:
Federal Provincial
Tax Bracket Tax Bracket
Bill Martin 15.0 Percent 6.0 Percent
Dave Martin 20.5 Percent 9.5 Percent
Charles Martin 29.0 Percent 14.0 Percent
The provincial dividend tax credit on eligible dividends is equal to 30 percent of the dividend
gross up.
For a number of years, they have been interested in the securities of Moland Industries, a
Canadian public corporation, and, on January 1 of the current year, they are considering two
securities of the Company that are currently outstanding . These securities and their invest-
ment characteristics are as follows:
Bonds The Company has a large issue of debenture bonds that has a coupon
interest rate of 6 percent. They are selling at par value and mature in 18 years.
Preferred Stock The Company has an issue of preferred shares that is offering an
eligible dividend of 4 percent based on the current market price. The dividend is
cumulative, but not participating .
The income from these investments would not move any brother to a higher federal or provin-
cial tax bracket. Each brother has sufficient income to use all of his available tax credits.
Required: Advise each of the Martin brothers as to which investment they should make. As
part of your recommendation, calculate the after tax income that would be generated for each
of the brothers during the current year, assuming that they invested their $20,000 in:
A. the Moland Industries bonds.
B. the Moland Industries preferred stock.


(Income Trusts And Mutual Funds)
On January 1, 2018, Mr. Irwin Mendez acquires the following investments:
• 2,500 units of the Realty Income Trust. The cost is $35.00 per unit for a total cost of
$87,500.
• 3,500 units of the Pickett Global Fund, a mutual fund trust. The cost is $54.00 per unit
for a total cost of $189,000.
During 2018, the Realty Income Trust makes an annual distribution of $2.75 per unit, of which
$.75 is designated as a return of capital. The remaining $2.00 is ordinary income. Irwin has
elected to use the Trust’s DRIP and, as a consequence, the entire distribution is reinvested in
new trust units at a cost of $36.00 per unit.
Also during 2018, the Pickett Global Fund makes a distribution of $4.50 per unit. This distri-
bution is made up of capital gains of $2.00, eligible dividends of $1.75, and a return of capital
of $0.75. The entire distribution is reinvested in Pickett Global Fund units at a cost of $50.00
per unit.
Irwin has other investment income that places him in the 29 percent federal tax bracket. Taxes
on this income are sufficient to use all of his available tax credits before considering the effects
of the two investments described above. He lives in a province where the maximum rate is 13
percent and the tax credit on eligible dividends is 24 percent of the gross up.
distributions by the two trusts. In addition, indicate the per unit adjusted cost base for each of
the trust units on December 31, 2018.


(Foreign Property Income, Income Trusts And Mutual Funds)
On January 1, 2018, Mr. Bradley Temrik acquires the following investments:
Foreign Currency Term Deposit A £225,000 term deposit which pays interest at 5
percent per annum. On December 31, 2018, interest of £11,250 is paid on this term
deposit. The taxation authorities in the U.K. withhold 25 percent of this payment,
with the remaining 75 percent being remitted to Bradley. Assume that throughout
2018, £1 = $1.70.
Income Trust Units 4,500 units of Canadian Realty Trust at $56 per unit. The total
cost is $252,000.
Mutual Fund Units 6,200 units of Fidelitee Large Cap at $32 per unit. The total cost
is $198,400.
During the year ending December 31, 2018, the following additional transactions occur:
Canadian Realty Trust This trust has a distribution of $5.20 per unit. Of this total,
$2.40 represents a return of capital, with the remainder being business income. Mr.
Temrik reinvests the entire amount that he receives in additional units at a cost of $59
per unit.
Fidelitee Large Cap This mutual fund has a distribution of $3.75 per unit. This is
made up of capital gains of $1.00 per unit, interest of $1.25 per unit, and eligible divi-
dends of $1.50 per unit. All of this distribution is reinvested to acquire additional
units of Fidelitee at $28 per unit.
Bradley has other investment income that places him in the 29 percent federal tax bracket.
Taxes on this income are sufficient to use all of his available tax credits before considering the
effects of the investments described above. He lives in a province where the maximum rate is
16 percent and the tax credit on eligible dividends is 30 percent of the gross up.
interest on the term deposit and the distributions by the two trusts. In addition, indicate the
per unit adjusted cost base for each of the two trust units on December 31, 2018. Ignore any
tax implications resulting from the Canada/U.K. tax treaty.


Mr. Jean Benoit is 67 years of age, is married, and has two children. His spouse, Suzie, turned
65 during 2018. Her Net Income For Tax Purposes for the year is $6,250. This is made up of
OAS benefits of $2,000 and $4,250 in pension income. During 2018, Suzie attends university
on a full time basis for 10 months of the year. Jean paid her tuition fees of $7,800.
Jean’s daughter, Sylvie, is 29 years of age and has a disability that qualifies her for the disability
tax credit. For 2018, her Net Income For Tax Purposes is nil. She lives with Jean and is totally
dependent on him.
Jean’s son, Pierre, is 26 years of age. Because of difficulties with anger management, he has
been unemployed for the last three years. During 2018, his Net Income For Tax Purposes is
nil, he lives in the family residence, and is completely dependent on his father.
The family ’s medical expenses, all of which have been paid by Jean, are as follows:
Jean $ 3,240
Suzie 1,850
Sylvie 10,550
Pierre 4,320
Total Medical Expenses $19,960
During 2018, Jean makes contributions to registered charities of $4,450 and contributions to
the federal Conservative Party in the amount of $870.
For many years Jean was employed as an engineer by a large Canadian public company. He
retired when he turned 65 and, during 2018, receives income from this employer’s pension
plan of $37,000. In addition, he has retained options to acquire 5,000 of his employer’s
shares at a price of $12 per share. When the options were granted the shares were trading at
$12 per share.
On July 1, 2018, Jean exercises all of these options. At this time the shares are trading at $21
per share and Jean immediately sells the shares for that price. The employer did not deduct EI
premiums or CPP contributions on behalf of Jean.
Jean received CPP benefits of $10,000 in 2018. Since Jean has had income of over $150,000
for the last five years and anticipates income at this level for the rest of his life, he has not
applied to receive OAS benefits.
During 2018, Jean received the following dividends (all amounts in Canadian dollars):
Eligible Dividends From Taxable Canadian Corporations $ 9,250

Non-Eligible Dividends On Shares In His Brother’s CCPC 4,670
Dividends On Foreign Shares - Net Of 10 Percent Withholding 7,785
Total Dividends Received $21,705
In addition to dividends, Jean had 2018 interest income of $8,742.

Because of the continuing financial needs of his family, after his retirement from his employer,
Jean started an engineering services business. In 2015 he acquired a new building to be used
as an office for his business. The building cost $320,000 of which $80,000 was the estimated
value of the land. It was allocated to a separate CCA Class 1. On January 1, 2018, the UCC of
the building is $230,000.

The building contains office furniture and fixtures that were acquired at a cost of $25,000. On
January 1, 2018, they have a UCC of $22,579.
During 2018, he spends $28,000 on improving and upgrading the building . In addition, he
sells the old furniture and fixtures for $12,500 and acquires replacement furniture and
fixtures for $42,100.
As Jean has no reason to keep detailed accounting records, he records business income on a
cash basis. For 2018, his net cash flow from operations was $67,500. Relevant figures for the
beginning and end of 2018 are as follows:
January 1 December 31
Billed Receivables $12,800 $15,400
Unbilled Work In Process 15,600 17,800
Accounts Payable 4,500 5,250
Until 2018, Jean has used his personal vehicle for business purposes. However, as of January
1, 2018, he leases an automobile with a manufacturer’s list price of $47,000. The lease
payment, which does not include any payment for insurance, is $810 per month. No down
payment or security deposit is required on the lease and he is not required to purchase the car
at the end of the lease term. The lease payments were deducted in the determination of his
net cash flow from operations. The car is used 100 percent for business activity.
Required: Calculate Mr. Benoit’s 2018 minimum Net Income For Tax Purposes, his 2018
minimum Taxable Income, and his 2018 minimum federal Tax Payable. Ignore GST/HST/PST
considerations and the possibility of pension income splitting .

SSS Solution Seven - 1

Case A
Under ITA 20.1 (disappearing source provision), the $190,000 balance will be deemed to be
used to produce income. Therefore, he can continue to deduct the interest.
Case B
While the loan is secured by income producing assets, the direct purpose of the loan was not
income producing . The interest cannot be deducted.
Case C
Since the proceeds exceed the borrowings, Mr. Brock has complete flexibility with respect to
linking . He could allocate all of the $42,000 to property A or B or alternatively, $21,000 to
each. Any allocation totaling $42,000 would be acceptable.
Case D
When the value of the replacement property is less than the amount borrowed, the taxpayer
must use a pro-rata allocation of the borrowed money. In this case, the result would be an allo-
cation of $25,000 [($20,000 ÷ $80,000)($100,000)] to property A and an allocation of
$75,000 [($60,000 ÷ $80,000)($100,000)] to property B.


Rental And Other Income
The required net rental income information can be calculated as follows:
18 Prince 4 McManus 94 George 125 West

Street Street Street Street
Rental Revenues $6,000 $5,000 $42,000 $10,000
Property Taxes ( 1,200) ( 1,550) ( 5,200) ( 1,750)
Interest Charges ( 1,750) ( 650) ( 7,800) ( 5,000)
Other Expenses (Excluding CCA) ( 1,000) ( 2,500) ( 8,500) ( 4,000)
Rental Income (Loss) Before CCA $2,050 $ 300 $20,500 ($ 750)
The terminal loss for Class 8 would be calculated as follows:

Opening UCC $8,000
Disposition - Lesser Of:
• Cost = $15,000
• Proceeds Of Disposition = $5,000 ( 5,000)
Balance With No Remaining Assets In The Class $3,000
Terminal Loss On Class 8 Assets ( 3,000)
CCA Base Nil
The calculation of net rental income would be as follows:

Rental Income (Loss) Before CCA
($2,050 + $300 + $20,500 - $750) $ 22,100
Terminal Loss On Class 8 Assets ( 3,000)
Income Before CCA $19,100
CCA (See Following Discussion) ( 19,100)
Net Rental Income Nil
CCA Deduction
As 18 Prince and 4 McManus each cost less than $50,000, they can be grouped into a single
CCA Class 1. The opening UCC in this Class 1 would be $50,000 and, when the $42,000
capital cost of 18 Prince is deducted, a balance remains. This means that there will be no
recapture on the sale of 18 Prince.
Maximum available CCA would be calculated as follows:
4 McManus [(4%)($50,000 - $42,000)] $ 320
94 George [(4%)($550,000)] 22,000
125 West [(4%)($98,000)] 3,920
Total Available $26,240
As the deduction of CCA cannot be used to create a rental loss and, as a consequence, the
actual deduction would be limited in this situation to $19,100, the net amount of rental
income on the 4 properties. This is less than the maximum available of $26,240, resulting in a
situation in which there are various possibilities with respect to how much of the $19,100 will
be deducted from the buildings in each Class 1.
In general, CCA should be taken on assets with a lower rate first in order to leave more flexi-
bility in the future. However, in this case, all the rates are the same.

Since Mr. Stanton intends to sell 4 McManus and 125 West in the near future for proceeds that
are greater than the UCC in their respective Class 1 pools, he should not take CCA on those
Classes this year as it would increase the recapture in the following year.
Even if he did not plan on selling any of the properties, it would probably leave him more
future flexibility if the $19,100 was taken from 94 George Street, the Class with the largest
UCC.
Note that even though 125 West generated a net rental loss of $750, CCA could still be taken
on that Class as there was rental income before CCA when all rental properties were
considered.
Taxable Capital Gain

In addition to the rental income, there is a taxable capital gain on the sale of 18 Prince Street of
$9,000 [(1/2)($60,000 - $42,000)].


Part A
The combined tax rates for the three brothers are 21 percent (15% + 6%), 30 percent (20.5%
+ 9.5%), and 43 percent (29% + 14%). Given these rates, the after tax returns on the bonds
Bill (21%) Dave (30%) Charles (43%)

Interest [(6%)($20,000)] $1,200 $1,200 $1,200
Federal/Provincial Tax Payable
At 21, 30, And 43 Percent ( 252) ( 360) ( 516)
After Tax Return $ 948 $ 840 $ 684
Part B
The after tax returns resulting from an investment in the Moland Industries Preferred Stock
begins with the calculation of the federal and provincial Tax Payable:

Dividends [(4%)($20,000)] $ 800 $ 800 $ 800
Gross Up Of 38 Percent 304 304 304
Taxable Dividend $1,104 $1,104 $1,104
Combined Rate (See Part A) 21% 30% 43%
Tax Before Dividend Tax Credit $ 232 $ 331 $ 475
Dividend Tax Credit
[(6/11 + 30%)($304)] ( 257) ( 257) ( 257)
Tax Payable (Tax Savings) ($ 25) $ 74 $ 218
Based on the preceding calculations of federal and provincial Tax Payable, the after tax returns
on the preferred shares are calculated as follows:
Dividends [(4%)($20,000)] $800 $800 $800
Tax Savings (Tax Payable) 25 ( 74) ( 218)
After Tax Return $825 $726 $582
Comparison
A comparison of the after tax rates of return can be made as follows:

After Tax Interest $948 $840 $684
After Tax Dividends ( 825) ( 726) ( 582)
Advantage If Bonds Purchased $123 $ 114 $ 102
Recommendation
For each of the brothers, the bonds are the preferable investment as the after tax return is
higher. While the problem does not require comment on this, we would note that the bonds
are also the lower risk alternative.


Taxable Income And Tax Payable
The amount of taxable income and tax payable resulting from the two investments would be
calculated as follows:
Realty Distribution [($2.75)(2,500)] $6,875

Return Of Capital [($0.75)(2,500)] ( 1,875) $ 5,000
Pickett Capital Gain [($2.00)(3,500)] $7,000

Non-Taxable One-Half ( 3,500) 3,500
Pickett Eligible Dividends [($1.75)(3,500)] $6,125

Dividend Gross Up [(38%)($6,125)] 2,328 8,453
Pickett Return Of Capital [($.75)(3,500) = $2,625] Nil

Tax Rate (29% + 13%) 42%
Tax Before Dividend Tax Credit $ 7,120
Dividend Tax Credit [($2,328)(6/11 + 24%)] ( 1,829)
Tax Payable $ 5,291
Adjusted Cost Base - Realty

The reinvestment of the $6,875 distribution at $36.00 per unit would acquire an additional
190.97 units. After recognizing these changes, the adjusted cost base per unit would be as
follows:
$34.37 [($87,500 + $6,875 - $1,875) ÷ (2,500 + 190.97)]
Adjusted Cost Base - Pickett

The reinvestment of the $15,750 [($4.50)(3,500)] distribution at $50.00 per unit would
acquire an additional 315 units. After recognizing these changes, the adjusted cost base per
unit would be as follows:
$52.98 [($189,000 + $15,750 - $2,625) ÷ (3,500 + 315)]


Note This problem is somewhat unrealistic in that, under the Canada/U.K. tax
treaty, it is unlikely that there would be any amounts withheld on interest payments
between the two countries (see Chapter 20).
Note that this problem does not contain enough information to do a complete calcula-
tion of the foreign tax credit which is not covered until Chapter 11. We have assumed
that the credit is equal to the maximum 15 percent of the amount withheld.
Taxable Income And Tax Payable
The amount of taxable income and tax payable resulting from the investments would be calcu-
lated as follows:
Interest On Term Deposit [(£11,250)($1.70)] (Note) $19,125

Excess Withholding [(25% - 15%)(£11,250)($1.70)] ( 1,913) $17,212
Canadian Realty Trust Distribution [($5.20)(4,500)] $23,400

Return Of Capital [($2.40)(4,500)] ( 10,800) 12,600
Fidelitee Capital Gain [($1.00)(6,200)] $ 6,200

Non-Taxable One-Half ( 3,100) 3,100
Fidelitee Eligible Dividends [($1.50)(6,200)] $ 9,300

Dividend Gross Up [(38%)($9,300)] 3,534 12,834
Fidelitee Interest [($1.25)(6,200)] 7,750

Tax Rate (29% + 16%) 45%
Dividend Tax Credit [($3,534)(6/11 + 30%)] ( 2,988)
Foreign Tax Credit [(15%)(£11,250)($1.70)] (Note) ( 2,869)
Tax Payable $18,216
Note - Foreign Source Property Income As required, 100 percent of the foreign
interest is included in Net Income For Tax Purposes. However, for individuals, the
credit against Tax Payable that is provided under ITA 126(1) is limited to a maximum of
15 percent of the foreign source non-business income. Since the withheld amount
exceeds 15 percent, the excess is deducted and does not qualify for treatment as a
foreign tax credit.
Adjusted Cost Base - Canadian Realty Trust

The reinvestment of the $23,400 [($5.20)(4,500)] distribution at $59 per unit would acquire
an additional 396.61 units. After recognizing these changes, the adjusted cost base per unit
would be as follows:
$54.04 [($252,000 + $23,400 - $10,800) ÷ (4,500 + 396.61)]
Adjusted Cost Base - Fidelitee Large Cap

The reinvestment of the $23,250 [($3.75)(6,200)] distribution at $28 per unit would acquire
an additional 830.36 units. After recognizing these changes, the adjusted cost base per unit
$31.53 [($198,400 + $23,250) ÷ (6,200 + 830.36)]


Employment Income
While Jean is no longer an employee, he can claim the Canada Employment tax credit as the
exercise of the options creates employment income calculated as follows:
Fair Market Value Of Shares [(5,000)($21)] $105,000
Exercise Cost [(5,000)($12)] ( 60,000)
Employment Income $ 45,000
Capital Gains
While Jean sold the shares he acquired through stock options, they were sold immediately,
resulting in no capital gain or loss on the disposition.
Property Income
Jean's property income is calculated as follows:
Eligible Dividends Received $ 9,250
Gross Up Of Eligible Dividends (38%) 3,515
Non-Eligible Dividends Received 4,670
Gross Up Of Non-Eligible Dividends (16%) 747
Gross Foreign Dividends ($7,785 ÷ 90%) 8,650
Interest 8,742
Property Income $35,574
Net Business Income

Jean's net business income is calculated as follows:
Income On Cash Flow Basis $67,500

December 31 Receivables 15,400
January 1 Billed Receivables ( 12,800)
December 31 Work In Process (Note 1) 17,800
January 1 Work In Process ( 15,600)
December 31 Accounts Payable ( 5,250)
January 1 Accounts Payable 4,500
Accrual Based Income $71,550
CCA ($7,476 + $14,640) (Note 2) ( 22,116)
Non-Deductible Lease Payments (Note 3) 2,421
Net Business Income $51,855
Note 1 Since Jean is an engineer, he was not able to use the billed basis of income
recognition. This means that he is not eligible for the transitional provision related to
the billed basis and must include 100 percent of his unbilled work in progress in his
income.
Note 2 The CCA for the furniture and fixtures (Class 8) would be calculated as
follows:

January 1, 2018 UCC $22,579

Additions 42,100
Disposals - Lesser Of:
• Proceeds Of Disposition = $12,500
• Capital Cost = $25,000 ( 12,500)
Base For CCA $37,379
Rate 20%
CCA $ 7,476
The CCA for the building (Class 1) would be calculated as follows:

January 1, 2018 UCC $230,000
Additions (Improvements) 28,000
Base For CCA $244,000
Rate 6%
CCA $ 14,640
As the building was acquired new and was used 100 percent for non-residential
purposes, it is eligible for the 6 percent CCA rate. The fact that it was the only building
owned by the business would result in it automatically being allocated to a separate
class, but it must remain in a separate Class 1 to continue to qualify for the 6 percent
rate.
Note 3 The total deductible car lease payment is the least of:
• $9,720 [(12)($810)] - the actual amount paid
• $9,600 [($800)(12)] - the annual limit using the $800 monthly maximum
• $7,299 {[($810)(12)] [$30,000 ÷ (85%)($47,000)]} - the deductible limit using
the $47,000 manufacturer’s list price
Using the manufacturer’s list price limit, the amount that must be added back to
income for the year is $2,421 ($9,720 - $7,299).

Mr. Benoit’s Net Income For Tax Purposes would be calculated as follows:
Employment Income $ 45,000
Property Income 35,574
Net Business Income 51,855
Pension Income 37,000
CPP Benefits 10,000
Taxable Income
Jean’s Taxable Income would be calculated as follows:
Stock Option Deduction [(1/2)($45,000)] ( 22,500)

Tax Payable
Tax Payable would be calculated as follows:
Tax On First $144,489 $29,877
Tax Credits:
Basic Personal Amount (Jean Benoit) ($11,809)
Spouse ($11,809 - $6,250) ( 5,559)
Canada Caregiver - Sylvie ( 6,986)
Jean’s Age Credit [$7,333 - (15%)($179,429 - $36,976)] Nil
Jean’s Pension Credit ( 2,000)
Transfer Of Spouse’s Age Credit
[$7,333 - (15%)($6,250 - $36,976) ( 7,333)
Transfer Of Spouse’s Pension Credit ( 2,000)
Transfer Of Spouse’s Tuition - Lesser Of:
• Actual Tuition Cost Of $7,800
• Absolute Maximum Of $5,000 ( 5,000)
Transfer Of Sylvie’s Disability Credit ( 8,235)
Medical Expenses (Note 4) ( 17,658)
Rate 15% ( 10,166)
Charitable Donations (Note 5)
[(15%)($200) + (29%)($4,450 - $200)] ( 1,263)
Dividend Tax Credit On:
Eligible Dividends [(6/11)($3,515)] ( 1,917)
Non-Eligible Dividends [(8/11)(16%)($4,670)] ( 543)
Foreign Tax Credit (Amount Withheld = 10 Percent) ( 865)
Political Contributions [(3/4)($400) + (1/2)($350) + (1/3)($120)] ( 515)
Note 4 The claim for medical expenses is determined as follows:

Expenses Of Jean And Suzie ($3,240 + $1,850) $ 5,090
• [(3%)($179,429)] = $5,383
Balance Before Dependants 18 And Over $ 2,788
Pierre’s Medical Expenses $ 4,320
• $2,302
• [(3%)(Nil)] = Nil Nil 4,320
Sylvie’s Medical Expenses $10,550

• $2,302
• [(3%)(Nil)] = Nil Nil 10,550
Note 5 As none of his income is taxed at 33 percent, this rate will not be applicable
to the calculation of the charitable donations tax credit.

Self Study Problem Eight - 1

(Identical Properties)
Over the past few years, Mr. Hall has taken an interest in the common shares of Clarkson
Industries Ltd., a Canadian public company. As he is approaching retirement age and antici-
pates moving to Florida, he sold his total holding of Clarkson shares on March 15, 2018, when
the shares were trading at $174 per share. Over the years, Mr. Hall has had the following trans-
actions in the shares of Clarkson Industries:
• On October 15, 2012, he purchases 5,500 shares at $40 per share.
• On November 8, 2012, he sells 1,500 shares at $52 per share.
• On December 12, 2014, he purchases 3,200 shares at $79 per share.
• On February 3, 2015, he sells 2,600 shares at $94 per share.
• On January 15, 2016, he receives a 10 percent stock dividend that has been paid by
Clarkson Industries. As part of this transaction, the Company transfers retained earnings
of $99 per dividend share to contributed capital.
• On June 15, 2016, he acquires 3,800 shares at $104 per share.
• On December 23, 2017, he receives a 10 percent stock dividend that has been paid by
Clarkson Industries. As part of this transaction, the Company transfers $125 per dividend
share from retained earnings to contributed capital.
Required: Determine the amount of the taxable capital gain or allowable capital loss that
would arise from:
• the sale on November 8, 2012,
• the sale on February 3, 2015, and
• the sale on March 15, 2018.
Ignore transaction costs in all of your calculations.


(Warranties On Capital Assets)
On May 1, 2017, Mr. Rowe sold a parcel of suburban land to a developer for $2,600,000. The
land had cost Mr. Rowe $1,400,000 15 years ago, and no additions or improvements had been
made to the land. He classifies any gain on the land sale as a capital gain. In order to convince
the purchaser that he should pay the full $2,600,000 in cash, Mr. Rowe has agreed to refund a
part of the purchase price if less than 100 lots are sold by December 1, 2018.
Specifically, the agreement calls for a refund of $26,000 for each of the 100 lots that is not sold
within the specified period. At the time of the sale, Mr. Rowe estimates that he will probably
have to pay $104,000 to the purchaser on December 1, 2018.
Over the next two years, a number of plants in the area are closed, substantially reducing the
demand for the lots in the development. By December 1, 2018, only 60 lots have been sold
and Mr. Rowe is obliged to pay the purchaser $1,040,000 [($26,000)(40 Lots)] as agreed.
Required: Describe the tax effects associated with the sale of the land and the guarantee
provided by Mr. Rowe at the time the land is sold and with the payment that he is required to
make on December 1, 2018. Include the effects of this payment on the Tax Payable of other
years.

(Capital Gain Reserves)
Ms. Fabrice purchased a tract of land 10 years ago for $430,000. It was sold during 2018 for
consideration of $1,730,000. She receives a down payment of $519,000 and accepts a 14
year, 8 percent mortgage for the balance of $1,211,000. The payments on this mortgage
begin in the second year and require the repayment of $86,500 per year in capital.
Ms. Fabrice wishes to use reserves to defer the payment of taxes on capital gains for as long as
possible. She classifies any gain on the land sale as a capital gain.
Required: Calculate the capital gains taxation effects of this sale, assuming that Ms. Fabrice
deducts the maximum capital gains reserve in 2018 and subsequent years.

Study Problem Eight - 5

(Capital Gains Reserves)
Several years ago, Ms. Natasha Simone acquired an existing building to be used in her unin-
corporated business. The total cost of the property was $1,200,000, with $250,000 of this
amount representing the estimated fair market value of the land on which the building was
situated.
Natasha had suffered from serious bouts of depression in the past and realized that the stress
from running her business was putting her mental health at risk. As a consequence, she
decides she must stop operations and sell the assets of the business.
On January 1, 2018, the building that was used in the business was sold for $1,500,000, with
$300,000 of this amount representing the estimated fair market value of the land on which the
building was situated. The January 1, 2018 UCC balance in Class 1 was $790,742. The
building was the only asset in this Class.
The terms of the sale require the buyer to make a down payment at the time of purchase, with
the remaining balance payable on January 1, 2020. No payments are required in 2019.
Interest on the outstanding balance is paid on December 31 at an annual rate of 6 percent.
Natasha plans to use reserves to defer the payment of taxes on the capital gain which results
from this sale.
Required: Indicate the tax effects of these transactions on Natasha's Net Income For Tax
Purposes for the years 2018, 2019, and 2020, assuming:
A. that the down payment was equal to 10 percent of the sales price.
B. that the down payment was equal to 30 percent of the sales price.
Study Problem Eight - 5

(Bad Debts On Capital Asset Sales)
Marjory Simpkins has decided to wind down her business, Simply Simpkins. The proprietor-
ship has a December 31 year end.
During December, 2017, Mrs. Simpkins sold a non-depreciable capital asset which was used
in her business for $25,000. She had purchased the asset for $15,000. Mrs. Simpkins
accepted a down payment of $15,000 and a note for $10,000 due December 1, 2018. No
interest payments were required on the note and, because Mrs. Simpkins had very little other
income during 2017, she did not establish a capital gains reserve.
Beginning in September, 2018, Mrs. Simpkins tried to locate the purchaser. She was not
successful and it appeared the purchaser had disappeared without a trace. As a reflection of
this fact, Mrs. Simpkins wishes to write off the bad debt in 2018.
Required: Determine the 2017 and 2018 tax effects resulting from the preceding events.


(Warranties, Bad Debts, and Reserves)
Lawrence Wallack owns a tract of undeveloped land near Perth, Ontario. It was acquired a
number of years ago at a cost of $2,160,000.
On November 1, 2018, an Ottawa developer made Lawrence an offer of $6,680,000 for the
land which he accepts.
In order to facilitate the transaction, Lawrence agrees to an initial payment of $2,180,000,
followed by annual payments of $1,500,000 on December 31 in each of the years 2019,
2020, and 2021. Interest, calculated at an annual rate of 4 percent on the opening balance for
the year, is also payable on December 31 of each of these years. Given this arrangement,
Lawrence plans to use capital gains reserves to defer taxes to the maximum extent possible.
To further facilitate the transaction, Lawrence agrees to share the developer's risk by providing
a warranty against unsold lots. As the developer plans to divide the property into 200 indi-
vidual lots, Lawrence has agreed to reimburse the developer an amount of $20,000 for each
lot that is not sold by December 1, 2020.
By December 1, 2020, only 150 lots have been sold. As agreed, Lawrence pays the developer
$1,000,000 [(200 - 150)($20,000)] on December 30, 2020.
The interest and principal payments for 2019 and 2020 are made as required by the
agreement.
During 2021, the developer is unable to sell any further lots and, on August 1, 2021, the devel-
oper declares bankruptcy. Lawrence does not anticipate being able to collect any of the
remaining balance on the loan or the final interest payment.
Required: Calculate the tax effects of the transactions that took place during 2018 through
2021 on Lawrence Wallack's Net Income For Tax Purposes.


(Principal Residence Designation)
Alice Stewart has owned a large country home near Toronto since 2002. It was acquired at a
cost of $850,000.
Because of her growing need to spend time in the city, in 2011 she acquired a Toronto condo-
minium at a cost of $625,000.
At the beginning of 2018, she concludes that she would like to move to the west coast and, to
this end, she sells both of her Ontario properties. The country home is sold for $1,200,000
during June, 2018. The Toronto condominium is sold in July, 2018 for $900,000. Real estate
commissions of 5 percent of the sales price were charged on both transactions.
As Ms. Stewart has been the only individual to use these properties, either one could be desig-
nated as her principal residence for the relevant years. Ms. Stewart wishes to minimize any
capital gains resulting from the sale of the two properties.
Required: Describe how the residences should be designated in order to accomplish Ms.
Stewart’s goal. In addition, calculate the total amount of the gain that would arise under the
designation that you have recommended.


(Personal Use Property)
As the result of some very bad investment decisions, Ms. Rita Forest is in need of additional
cash resources. In order to raise these funds, she has sold a number of assets during the
current year. The description of these dispositions is as follows:
1. She sold an oil painting by Group of Seven artist A. Y. Jackson at auction for $780,000,
with the auction house charging a commission of 10 percent of the sale price. It was
acquired for $698,000.
2. At his death, her father left her with his large collection of miniature vehicles. While
he had acquired these vehicles at a total cost of $4,500, at the time of his death, they
were valued a $12,000. Ms. Forest sells the collection to a collector for $23,000.
3. Rita was given an antique doll house when she was a child. While it had only cost her
parents $500, it had increased significantly in value. It was sold through a local
antique store for $4,500. The store charged a commission of $450.
4. Rita has always loved sailing and, a number of years ago, she acquired a damaged boat
for $23,000. She spent $38,000 restoring it to working order and has enjoyed is use
for a number of years. It is sold for $48,000. No selling costs were involved.
5. Rita has a jewelry collection that is sold for $43,000. The total cost of the items in this
collection is $61,000.
6. Rita owns a rare first edition of Virginia Woolf's To The Lighthouse. It was acquired at a
cost of $12,500. It sells through a local bookstore for $14,200, with the bookstore
charging a commission of $400.
Required: Indicate the tax consequences of each of these dispositions. In addition, indi-
cate the total amount that will be included in Rita's Net Income For Tax Purposes, as well as any
carry over amounts that can be used in previous or subsequent years.


(Capital Gains On Foreign Securities)
Ms. Barbara Laval sometimes make investments on European stock exchanges that must be
paid for in Euros (€, hereafter). She is a Canadian resident and makes her purchases through a
Canadian brokerage account.
In July, 2016, she acquires 3,500 shares of Euron Ltd. at a cost of €30 per share. She acquired
the Euros to make this purchase at €1.00 = $1.46.
In January, 2018, she sells the Euron Ltd. shares for €33.50 per share. The Euros resulting from
this sale are left in her Euro trading account that is maintained with her Canadian broker.
In November, 2018, she converts her €117,250 [(3,500)(€33.50)] balance into Canadian
dollars, with the resulting balance being transferred to her Canadian dollar brokerage
account. She closes her brokerage account and withdraws all the funds in December, 2018.
Assume relevant exchange rates between the Euro and the Canadian dollar are as follows:
July 2016 €1.00 = $1.46
January, 2018 €1.00 = $1.49
November, 2018 €1.00 = $1.52
December, 2018 €1.00 = $1.60
Required: Calculate the minimum amount that will have to be included in Ms. Laval’s Net
Income For Tax Purposes for 2018 as a result of these transactions.


(Changes In Use - Depreciable Property)
On January 1, 2016 Ms. Laci Detweiler opens a consulting business. As a headquarters for this
new business, she acquires a property for $645,000, of which $120,000 is the estimated value
of the land. While her business occupies all of this property, it is not a new building and, as a
consequence, it does not qualify for the 6 percent enhanced CCA rate on buildings used for
non-residential purposes.
Laci has a large investment portfolio that generates more than $200,000 in income and capital
gains each year. She lives in a large home on the outskirts of town.
Since in its first year of operation, the business was not as successful as Laci had hoped, on
January 1, 2017, she converts 25 percent of the floor space into an apartment for her own use.
She plans to spend some nights there during the work week to save having to fight the traffic.
As the neighborhood in which the building is located has earned a reputation as a drug dealer
hangout, the estimated fair market value of the property by this date has fallen to $560,000,
with $100,000 of this total being allocated to the land on which the building is situated.
Near the end of 2017, a new upscale residential/retail complex opens near her building ,
resulting in both an increase in the number of clients for her business, as well as an increase in
the fair market value of her property. Based on this, on January 1, 2018, Laci converts her
apartment back to business usage, with her consulting business occupying the entire space
during the year ending December 31, 2018. At the time of the conversion, the fair market
value of the property is $690,000, with $130,000 of this value being allocated to the land on
which the building is situated.
Required: Determine the maximum CCA that can be deducted by Ms. Detweiler in 2016,
2017, and 2018 and the January 1, 2019 UCC of the building . In addition, indicate any other
tax consequences that will result from the changes in use of this property.


(Changes In Use And Rental Income With CCA)
Mr. Blake purchased his family home for a total cost of $528,000. It was estimated that the fair
market value of the land at this time was $249,000.
On January 1, 2017 a portion of this property was converted to an apartment, and rented to a
tenant at a rate of $2,550 per month, for a term of 18 months. At the time of this conversion,
the fair market value of the total property was $759,000. At this time, it was estimated that the
fair market value of the land was $318,000. The apartment was located in the back of the
house, faced a busy parking lot, and occupied 32 percent of the total floor space of the
property.
On June 30, 2018, at the end of the lease term, Mr. Blake and the tenant agree to reduce the
size of the area rented to 21 percent of the total floor space of the property. A new lease is
signed with a reduced rent of $2,250 per month and a new term of 30 months. On June 30,
2018, the fair market value of the property is $834,000. At this time, it was estimated that the
fair market value of the land was $330,000. Two months after the new lease is signed, Mr.
Blake makes improvements in the rented area of the property at a cost of $37,050.
During the year ending December 31, 2017, Mr. Blake made payments for insurance, hydro,
and property taxes on his property in the amount of $16,800. The corresponding figure for
the period January 1, 2018 through June 30, 2018 was $8,700. For the period July 1, 2018
through December 31, 2018, this amount was $9,600. There were no repair costs during
either 2017 or 2018. Mr. Blake deducts maximum CCA in each year.
Required: For each of the two taxation years 2017 and 2018, indicate the amounts that
would be included in Mr. Blake’s Net Income For Tax Purposes as the result of the preceding
transactions and events. Assume that Mr. Blake does not designate this property as his prin-
cipal residence in any of the years under consideration.


(Deemed Dispositions - Departure From Canada)
For all of his adult life, Mr. Lange has been a resident of Canada. However, in recent years, the
severity of the climate has begun to have an adverse influence on his health. As a conse-
quence, on January 1 of the current year, he is planning to move to Sarasota, Florida. On this
date, he owns the following assets:
Adjusted Fair Market
Cost Base Value
Vacant land $15,000 $ 46,000
Automobile 31,000 18,000
Coin collection 5,000 11,000
Common Shares In Enbridge Inc. (a public company) 24,000 38,000
Common Shares In BCE Inc. (a public company) 42,000 35,000
Preferred Shares In Royal Bank (a public company) 15,000 23,000
Common Shares In Nal Enterprises Ltd.
(a Canadian controlled private corporation) 26,000 153,000
Mr. Lange has come to you for advice just prior to moving to Florida.
Required: Determine the amount of the taxable capital gain or allowable capital loss that
Mr. Lange will report in his Canadian income tax return for the current year as a result of his
departure from Canada. Assume that the usual rules apply, with no elections being made by
Mr. Lange.

(Deferral On Small Business Investments)
The following two independent Cases involve dispositions of eligible small business corpora-
tion shares, with the proceeds being invested in replacement shares. In both Cases, the
original shares have been held for more than a year.
Case A On May 4, 2018, an individual sells his common shares in an eligible small busi-
ness corporation for $2,200,000. The adjusted cost base of these shares was $1,400,000.
On September 14, 2018, he invests $1,800,000 of these proceeds in common shares of a
different eligible small business corporation.
Case B In January, 2018, an individual sells his common shares in an eligible small busi-
ness corporation for $1,900,000. The shares have an adjusted cost base of $1,200,000.
In October, 2018, he invests $500,000 of these proceeds in Corporation A common
shares. At the same time, he invests $900,000 of the proceeds in Corporation B common
shares. Both Corporation A and Corporation B are eligible small business corporations.
Required: For both Cases, determine the maximum permitted capital gains deferral, as well
as the adjusted cost base of the replacement shares.


(Replacement Properties - ITA 13(4) Election On UCC)
Trail Resources Ltd. has a taxation year that ends on December 31. During 2018, its storage
building was destroyed in a flash flood. This building was purchased for $500,000 and, on
January 1, 2018, its UCC was $368,000. After negotiations with adjustors from the insurance
company, a settlement of $490,000 was agreed upon and paid during 2018.
A replacement building was contracted for, and started, in September, 2018. It was
completed in January, 2019 for a cost of $650,000. As the building is used exclusively for
non-residential purposes, it qualifies for the 6 percent CCA rate.
Trail Resources Ltd. does not own any other buildings and always takes maximum CCA. The
appropriate election is made by the Company to defer any recapture under ITA 13(4).
Required: Explain how the preceding transactions will affect the balance in the Company ’s
UCC during the period January 1, 2018 through January 1, 2020.


(Voluntary Dispositions - With ITA 44(6) Election)
The current operations of Morcan Inc. (MI) are located in Toronto. Because of the high cost of
living in this venue, the Company is experiencing difficulty in attracting new employees. In
order to correct this situation, the Company has decided to move its operations to Tweed,
Ontario, a small community with much lower living costs.
To this end, it sells all of its Toronto assets during December, 2018. Details of these transac-
tions are as follows:
Land And Building The Company's building and the land on which it is situated is
sold for a total of $3,400,000, of which $2,300,000 can be allocated to the building
and $1,100,000 can be allocated to the land. The land was acquired many years ago
at a cost of $350,000. After acquiring the land, the building was constructed at a cost
of $2,100,000. On January 1, 2018, the UCC of the building was $850,000. The
Company has no other Class 1 assets.
Equipment The equipment, all of which falls into Class 8, was acquired at a cost of
$450,000. On January 1, 2018, the UCC for Class 8 is $165,000. The equipment is
sold for $320,000.
In early 2019, the Company acquires a replacement building in Tweed for $3,100,000. Of
this total, it is estimated that $2,500,000 can be allocated to the building , with $600,000 allo-
cated to the land. As it is not a new building , it does not qualify for the enhanced CCA rate for
Class 1.
New equipment is acquired for the use in the building at a cost of $520,000. All of this equip-
ment is allocated to Class 8.
The Company would like to minimize any capital gains or recapture resulting from the sale of
the Toronto property. The Company ’s tax year ends on December 31, 2018, and it does not
own any buildings or equipment on this date.
Required:
A. For the disposition of each property, indicate the tax effects that would be included in the
Company’s 2018 tax return.
B. Indicate how these tax effects could be altered in an amended 2018 return by using the
elections available under ITA 44(1) (to defer capital gains) and ITA 13(4) (to defer recap-
ture), but without the use of the election under ITA 44(6) (to reallocate the proceeds of
disposition). Also indicate the adjusted cost base and, where appropriate, the UCC of the
replacement properties, subsequent to the application of the ITA 44(1) and ITA 13(4)
elections.
C. Indicate the maximum amount of any reduction in income in the amended 2018 Net
Income For Tax Purposes that could result from the use of the ITA 44(6) election and
calculate the UCC balance that would result from electing to use this amount. Should the
Company make the election? Explain your conclusion.


(Involuntary Dispositions - With ITA 44(6) Election)
On January 1, 2018, a fire completely destroys Fraser Industries Ltd.’s Edmonton office
building and all of its contents. An immediate settlement is negotiated with the Company ’s
fire and casualty insurer. The insurer agrees to pay $4,800,000 for the building and an addi-
tional $1,256,000 for the contents of the building . These amounts represent the estimated
fair market values of the destroyed assets and a cheque is received for these amounts on May
15, 2018.
As the City has been acquiring adjacent land for the development of a park, the Company is
notified on January 15, 2018 that the land on which the building was located will be expropri-
ated in order to expand the park area. The expropriation takes place on April 30, 2018 and
Fraser Industries Ltd. receives $723,000, which is the estimated fair market value of the land.
Other information on the Edmonton property is as follows:
Land The land was acquired at a cost of $256,000.
Building The building was constructed for a total cost of $3,700,000. It is the only
building owned by Fraser Industries Ltd. and, on January 1, 2018, the UCC in Class 1
was $1,856,000.
Building Contents The contents of the building consisted entirely of Class 8 assets.
These assets had a cost of $972,000 and the UCC of Class 8 was $72,000 on January 1,
2018. Fraser Industries Ltd. does not own any other Class 8 assets.
In replacing the destroyed property, the Company decides to relocate to an area that has
lower land costs. As a consequence, a replacement property is found in Hinton at a cost of
$6,200,000. It is estimated that the fair market value of the land on which the building is
located is $500,000. The remaining $5,700,000 is allocated to the building . As the building
is not new, it does not qualify for the 6 percent CCA rate.
The acquisition closes on November 1, 2019 and, during the following month, contents are
acquired at a cost of $1,233,000. All of the contents are Class 8 assets.
Fraser Industries has a December 31 year end.
Required:
2018 tax return of Fraser Industries Ltd.
B. Indicate how the results in Part A could be altered through the application of ITA 44(1) (to
defer capital gains) and ITA 13(4) (to defer recapture) in an amended 2018 return. Do not
consider the use of the election under ITA 44(6) (to reallocate the proceeds of
disposition).
C. Determine the adjusted cost base and, where appropriate, the UCC of the replacement
properties, subsequent to the application of the ITA 44(1) and ITA 13(4) elections.
D. Indicate the maximum amount of any reduction in income in the amended 2018 Net
determine the adjusted cost base and, where appropriate, the UCC of the replacement
properties, that would result from electing to use this amount. Should the Company make
the election? Explain your conclusion.


Family Information
Mr. Paul Klee is 39 year of age and lives with his spouse, Virginia Klee. They have two children,
May who is 9 years old and Max who is 12 years old. May has been blind since birth. During
2018, Max has income of $8,200.
Virginia is 38 years and until recently was employed by a large public company. However, in
September, 2017, she commenced full time studies at her local university. During 2018, she
was in full time attendance for 9 months. Her tuition fees were $9,350. She had 2018 income
from various part time sources of $8,400.
During 2018, the family incurs medical expenses as follows:
Paul $ 1,100
Virginia 1,750
May (No Attendant Care Costs) 13,300
Max 650
Total $16,800
Employment Information
Paul is employed as a salesperson by a Canadian public company. His annual salary is $85,000
and, in addition, he earns commissions of $62,500. The following amounts are withheld by
his employer during 2018:
RPP Contributions $4,100
EI 858
CPP 2,594
Professional Association Dues 1,500
Annual United Way Donations 1,200
Paul’s employer makes a matching contribution to his RPP of $4,100.
Paul's employer requires that he maintain an office in his home and has provided him with the
requisite Form T2200. This office occupies 20 percent of the total floor space in his home. His
home operating costs for 2018 are as follows:
Maintenance And Utilities $3,400
Insurance 850
Paul's employer provides a $2,500 per month allowance to cover all of his employment
related expenses, including an automobile that he owns personally. The automobile was
acquired in 2017 at a cost of $45,000. In his 2017 tax return he claimed CCA based on the
automobile being used 55 percent for employment related activities. For 2018, the usage
increased to 80 percent.
Paul's employment related expenses for 2018 are as follows:
Automobile Operating Expenses $ 6,100
Hotels 11,500
Airline And Other Transportation 9,200
Client Meals And Entertainment 10,400

Two years ago, Paul's employer granted him options to buy 1,500 shares of the company stock
at $15 per share. At that time, the shares were trading at $12 per share. In February, 2018,
when the shares are trading at $19 per share, Paul exercises all of these options. In November,
2018, he sells all of these securities for $22 per share.
Other Information
1. Paul owned two very large oil paintings, each of which cost $10,000. Since he renovated
his home and added many more windows, he no longer had the wall space to hang these
paintings. During 2018, he sells one painting for $15,000 and the other painting for
$4,000.
2. Paul inherited a tract of land from his father. Paul's adjusted cost base for it was $100,000.
In July, 2018, he sells the land to help finance his home renovations. The sale price is
$350,000 and the terms of the sale require a 2018 payment of $100,000, with the balance
being paid in annual instalments of $50,000 in each of the years 2019 through 2023. Paul
would like to use a capital gains reserve to defer as much of this gain as possible.
3. During 2018, Paul received non-eligible dividends of $5,400.
4. Since 2013, Paul and his family have owned a cottage on a nearby lake. It had cost
$250,000, including an estimated value for the land of $75,000. As their use of this prop-
erty has declined over the years, they have decided to convert the cottage to a rental
property. At the time of the change, the property was appraised at $375,000, including
$100,000 for the land. During 2018, net rental income before the deduction of CCA
equals $23,000. Since his city home has had a very substantial increase in value, Paul
does not intend to designate the cottage as his principal residence for any of the years of
ownership.
Required: Calculate Mr. Klee’s minimum 2018 Net Income For Tax Purposes, his 2018
minimum Taxable Income, and his minimum 2018 federal Tax Payable. Ignore provincial
income taxes, any instalments he may have paid during the year, any income tax withholdings
that would be made by his employer, and GST/HST/PST considerations.


Employment Information
Mr. Lorenzo Desoto is 39 years old and is employed by a large public corporation with a
December 31 year end. In addition to his 2018 salary of $136,000, he earns commissions
during the year of $43,000. Because of his excellent performance, he has been awarded a
bonus of $22,000. One-half of this amount is payable in December, 2018, with the balance
being paid on July 15, 2019.
His employer withholds the following amounts from his 2018 income:
EI 858
CPP 2,594
Professional Association Dues 1,500
Annual United Way Contributions 2,400
Lorenzo’s employer makes a matching contribution to his RPP of $2,700.
Lorenzo’s employer provides an allowance of $2,500 per month to cover all of his employ-
ment related expenses, including the use of his personally owned automobile. This
automobile was acquired in 2017 at a cost of $46,500. In that year, he claimed CCA based on
the car being used 60 percent for employment related activities. In 2018, his employment
related usage increases to 80 percent.
For 2018, Lorenzo’s employment related expenses are as follows:
Automobile Operating Expenses $6,300
Hotels 9,700
Airline And Other Transportation 5,400
Client Meals And Entertainment 9,300
Lorenzo’s employer requires him to maintain an office in his home and has provided him with
a signed Form T2200. The office occupies 12 percent of the floor space in his home. The 2018
costs of operating this property are as follows:
Mortgage Interest $7,200
Insurance 1,250
Maintenance And Utilities 1,300
Several years ago, Lorenzo’s employer granted him options to buy 500 shares of the
company ’s stock at a price of $92 per share. This was the market value of the shares at the time
the options were granted. In January, 2018, when the shares are trading at $108 per share,
Lorenzo exercises all of the options. In December, 2018, the 500 shares are sold for $115 per
share.
Family Information
Lorenzo is married to Maria Desoto. She is 37 years old and has 2018 income of $6,300. Now
that her children are in their teens, Maria attends university on a full time basis during 8
months of the year. Her tuition for 2018 was $9,300.
The Desotos have two children, both born on April 1. Their son Gianni is 16 and has Net
Income For Tax Purposes of $6,200, largely from part-time summer jobs. Their daughter Anita
is 14 and is sufficiently disabled that she qualifies for the disability tax credit. Anita has no
2018 Net Income For Tax Purposes.

The family ’s 2018 medical expenses are as follows:

Lorenzo $ 1,350
Maria 3,425
Gianni 2,600
Anita (No Attendant Care Costs) 10,250
Total $17,625
Other Information
1. Lorenzo owns a glass sculpture with an adjusted cost base of $800. During 2018, he sells
this sculpture for $39,000.
2. Lorenzo owns a cottage on a local lake. It had cost $105,000, including an estimated
value for the land of $42,000. While the family has made good use of the property, at the
beginning of 2018, he decides to convert the cottage to a rental property. It is estimated
that, at this time, the cottage is worth $350,000, with $100,000 of this amount attribut-
able to the land. During 2018, net rental income before the deduction of CCA equals
$12,000. Lorenzo does not intend to designate the cottage as his principal residence in
any of his years of ownership.
3. Lorenzo owns 500 units of the Real Property Income Trust. The adjusted cost base of
these units on January 1, 2018 is $56.00 per unit. During 2018, the trust distributions
total $2.40 per unit, with all of this amount being property income. The entire distribu-
tion was reinvested in additional units on the basis of $58.50 per unit. During December
2018, all of these Trust units were sold for $60.25 per unit.
4. For several years, Lorenzo has owned a tract of land with an adjusted cost base of
$78,000. His intent was to eventually construct a rental property on this site. However,
with the conversion of the cottage to a rental property, he decides to reduce his real estate
holdings. To this end, the land is sold for $180,000. The buyer provides an immediate
payment of $54,000, with the balance payable in annual instalments of $18,000 begin-
ning in 2019.
5. During 2018, Lorenzo received eligible dividends of $4,200.
Required: Calculate Mr. Desoto’s minimum 2018 Net Income For Tax Purposes, his 2018
minimum Taxable Income, and his minimum 2018 federal Tax Payable. Ignore provincial
income taxes, any instalments he may have paid during the year, any income tax withholdings
that would be made by his employer, and GST/HST/PST considerations.

SSS Problem Eight - 1


(Identical Properties)
Over the last ten years, Ms. Julie Ho has engaged in the following transactions in the shares of
Alcor Ltd.:
Type Of Number Cost (Proceeds)
Date Transaction Of Shares Per Share
May, 2008 Purchase 200 $10.00
June, 2009 Purchase 150 14.75
April, 2012 Sale ( 75) ( 16.25)
July, 2014 Purchase 125 13.50
October, 2016 Purchase 180 12.75
July, 2018 Sale (200) ( 14.00)
Required: Determine the amount of any taxable capital gain or allowable capital loss
resulting from the 2018 sale of Alcor Ltd. shares.


(Warranties, Bad Debts, and Reserves)
For a number of years, Ms. Marcia Hanson has owned a tract of undeveloped land near
Regina. Ms. Hanson's adjusted cost base for the land is $1,350,000.
At the beginning of 2018, a developer offers $4,200,000 for the land and Ms. Hanson accepts
the offer.
As the developer will need a large portion of her resources to undertake the development, Ms.
Hanson agrees to accept a $1,200,000 down payment, with subsequent annual payments of
$1,000,000 on December 31 of each of the years 2019, 2020, and 2021. Interest, calculated
as 5 percent of the beginning of the year balance, is also payable on December 31 of each of
these years. Ms. Hanson intends to use capital gains reserves to defer taxes to the greatest
extent possible.
It is the intent of the developer to divide the property into 105 individual lots. There is,
however, considerable risk in the project as the lots are over 20 kilometers from downtown
Regina. Given this, Ms. Hanson agrees to reimburse the developer an amount of $10,000 for
each lot that is not sold by December 1, 2020.
By December 1, 2020, only 65 of the lots have been sold, a result which requires Ms. Hanson
to pay the developer $400,000 [($10,000)(40 Lots)] on December 20, 2020.
In 2019, and 2020, the developer makes the required interest and principal payments.
While the developer continues her efforts to market the lots through the first part of 2021, she
is not successful and, on June 1, 2021, she declares bankruptcy. As the developer appears to
have left the country, Ms. Hanson does not anticipate being able to collect any of the
remaining balance on the loan or the final interest payment.
Required: Calculate the tax effects of the transactions that took place during 2018 through
2021 on Ms. Hanson's Net Income For Tax Purposes.


(Principal Residence Designation)
In early 2018, Miss Mary Stern advises you that it is her intention to sell both her Ottawa resi-
dence and her condominium at Mt. Tremblant. She acquired both of these properties in 2004
and has spent at least a part of each subsequent year in residence at each property. The cost of
the Ottawa house was $173,000, while the Mt. Tremblant condominium was $131,000. She
provides you with the following additional information:
City Home Condo
Estimated Selling Price $325,000 $304,000
Anticipated Selling Costs 13,500 12,240
She has asked you to determine the minimum taxable capital gain that would result from the
sale of the two properties during 2018.
Required: Describe how the residences should be designated in order to accomplish Miss
Stern’s goal. In addition, calculate the amount of the taxable capital gain that would arise
under the designation that you have recommended.

(Personal Use Property)
During the current year, Mrs. Irene Vargo sold a number of personal assets, all of which she
had acquired in the last five years. The relevant information on these sales is as follows:
Cost Proceeds Selling Costs

Automobile $25,000 $27,000 $150
Coin Collection 1,600 1,300 50
Rare Manuscript 1,700 800 30
Boat 4,500 3,500 175
Painting 700 1,100 50
Antique Clock 800 1,700 50
Required: Determine the net taxable capital gain that Mrs. Vargo will include in her income
for the current year. Indicate any carry over amounts that can be used in previous or subse-
quent years.


(Capital Gains On Foreign Securities)
Ms. Petra Nobel is a Canadian resident who, on occasion, purchases securities for her
brokerage account in the Netherlands. In September of 2015, she acquired a large block of
shares of Gardengrow for 53,000 euros (€, hereafter). She purchased these shares with euros
acquired at a rate of €1.00 = $1.38.
In March, 2018, the Gardengrow shares were sold for €97,000, with the funds remaining in
her euro bank account until September. In September, the €97,000 was converted into Cana-
dian dollars and transferred to her Canadian bank account.
Assume relevant exchange rates between the euro and Canadian dollar are as follows:
September, 2015 €1.00 = $1.38

March, 2018 €1.00 = $1.48
September, 2018 €1.00 = $1.52
Required: Calculate the minimum amount that will have to be included in Ms. Nobel’s Net
Income For Tax Purposes for 2018 as a result of these transactions.

(Change In Use And Rental Income With CCA)
Ms. Marnie Houston acquired a residence 10 years ago for a total cost of $235,000. At the
time of purchase, it was estimated that the value of the land on which the house was situated
was $85,000. Until January 1, 2018, Marnie and her two children occupied all of the house.
Early in 2018, Marnie’s two children moved out, leaving a significant portion of the house
unused. Because of this, Marnie decides to move to a small apartment and retain the former
residence as a rental property. On April 1, 2018, a tenant moved into the house. Marnie does
not make an election under ITA 45(2). The ITA 45(2) election deems that the change in use has
not occurred.
Marnie had the house appraised on April 1, 2018. The appraiser indicated that the total value
of the property was $392,000, with $112,000 of this amount reflecting the value of the land
on which the house was situated.
For the period April 1, 2018 through December 31, 2018, Marnie’s expenses on the property
were as follows:
Property Taxes $4,600

Insurance 1,100
Maintenance And Operating Costs 1,850
The monthly rent was set at $1,900 per month, payable at the beginning of each month. The
tenant paid all amounts required during 2018.
Required: For the year ending December 31, 2018, determine Ms. Houston’s minimum net
rental income (loss). Your calculations should include the maximum available CCA, without
regard to whether the full amount can be deducted. Indicate any other tax consequences that
will result from the change in use.


(Deferral On Small Business Investments)
The following two independent Cases involve dispositions of eligible small business corpora-
tion shares, with the proceeds being invested in replacement shares. In both Cases, the
original shares have been held for more than a year.
Case A On June 30, 2018, Jonathan sells his common shares in Corporation A, which is
an eligible small business corporation. His proceeds of disposition are $585,000 and his
adjusted cost base is $371,000. On September 13, 2018, Jonathan invests $472,000 in
common shares of Corporation B, which is a new eligible small business corporation.
Case B On December 12, 2017, Lorraine disposes of common shares in Corporation C,

which is an eligible small business corporation. Her proceeds of disposition are
$1,253,000 and her adjusted cost base is $722,000. On February 1, 2018, Lorraine
acquires common shares in Corporation D, which is also an eligible small business corpo-
ration, at a cost of $1,346,000.
Required: For both Cases, determine the maximum permitted capital gains deferral, as well
as the adjusted cost base of the replacement shares.


(Replacement Properties - ITA 13(4) Election On UCC)
Farnham Inc. has a taxation year that ends on December 31. The Company carries on its oper-
ations in a single building . This building has a capital cost of $850,000 and, on January 1,
2018, its UCC was $113,000. The building’s furniture and fixtures (all Class 8) have a capital
cost of $220,000 and a January 1, 2018 UCC of $152,000. The Company has no other Class 8
assets.
On February 12, 2018, the building and its contents were completely destroyed in a fire. The
building was insured for its capital cost of $850,000 and the furniture and fixtures were
insured for $180,000. As the fire completely destroyed all of these assets, on June 18, 2018,
the Company received a payment from its insurer for $1,030,000 ($850,000 + $180,000).
In 2019, Farnham Inc. acquires a replacement building for $925,000. As this replacement
building is not a new building , it does not qualify for the 6 percent CCA rate.
During the following month, furniture and fixtures are installed in this new building at a cost of
$235,000.
Required: Ignore land values in calculating your solution:

A. Indicate the 2018 tax consequences that would result from the destruction of the building
and its contents.
B. Indicate the maximum amendments that could be made to the results described in Part A
by filing an election under ITA 13(4). Assuming that these amendments have been made,
determine the maximum CCA on the new building and the new Class 8 assets for the year
ending December 31, 2019. In addition, calculate the January 1, 2020 UCC balance for
each Class.
C. Assume that, instead of having the building and contents destroyed by fire, the Company
had sold the building and its contents for $1,030,000 in 2018 in order to voluntarily move
to the new location in 2019. How would the results in Part B differ?
D. Assume that the replacement building for the burned building had cost $700,000 instead
of $925,000. How would the results in Part B differ?


(Voluntary Dispositions - With ITA 44(6) Election)
Mr. Larson, the president of Larson Distributing Inc., was offered $1,875,000 for the land,
building , and equipment used by his business at its suburban Toronto location. As he believed
that his business could be operated at a less valuable rural location, he accepts the offer and
sells the business property on October 15, 2018. The details relating to this sale are as follows:
Land The land was acquired at a cost of $137,000. At the time of the sale, it was
estimated that the fair market value of the land was $772,000.
Building The building was constructed at a total cost of $605,000. At the time of
the sale, its UCC was $342,000, while its estimated fair market value was $989,000.
Equipment The equipment had an original cost of $452,000. On October 15,
2018, its UCC was $127,000 and its estimated fair market value was $114,000.
In 2019, Mr. Larson acquires a replacement property in Barry ’s Bay at a total cost of
$1,500,000. This cost is allocated as follows:
Land $ 253,000
Building 1,042,000
Equipment 205,000
Total $1,500,000
As the building is not a new structure, it is not eligible for the 6 percent CCA rate for Class 1
assets.
The Company would like to defer any capital gains or recapture resulting from the sale of the
Toronto property. The Company ’s tax year ends on December 31, 2018, and it does not own
any buildings or equipment on this date.
Required:
Company’s 2018 tax return. In addition, indicate how these tax effects could be altered in
an amended 2018 return by using the elections available under ITA 44(1) (to defer capital
gains) and ITA 13(4) (to defer recapture), but without the use of the election under ITA
44(6) (to reallocate the proceeds of disposition). Also indicate the adjusted cost base and,
where appropriate, the UCC of the replacement properties, subsequent to the applica-
tion of the ITA 44(1) and ITA 13(4) elections.
B. Indicate the maximum amount of any reduction in income in the amended 2018 Net
calculate the UCC balance that would result from electing to use this amount.

SSS Solution Eight - 1

The average cost of the shares sold in 2018 is calculated as follows:
Shares Acquired Cost Average

Acquisition (Sale) Date (Sold) Per Share Total Cost Cost
May, 2008 200 $10.00 $2,000.00
June, 2009 150 14.75 2,212.50
350 $4,212.50 $12.04
April, 2012 ( 75) $12.04 ( 903.00)
275 $3,309.50
July, 2014 125 $13.50 1,687.50
October, 2016 180 12.75 2,295.00
Totals 580 $7,292.00 $12.57
Given the preceding , the July, 2018 sale would result in a taxable capital gain calculated as
follows:
Proceeds Of Disposition [(200)($14.00)] $2,800.00
Adjusted Cost Base [(200)($12.57)] ( 2,514.00)
Capital Gain $ 286.00
Inclusion Rate 1/2
Taxable Capital Gain $ 143.00


2018 Results
The only tax consequence in this year is the capital gain that occurs on the sale. The gain,
along with the maximum deductible reserve, would be calculated as follows:
Proceeds Of Disposition $4,200,000
Adjusted Cost Base ( 1,350,000)
Reserve - Lesser Of:
• [($2,850,000)($3,000,000 ÷ $4,200,000)] = $2,035,714
• [($2,850,000)(20%)(4 - 0)] = $2,280,000 ( 2,035,714)
Inclusion Rate 1/2
As no provision can be made for the estimated cost of the warranty, the total Net Income For
Tax Purposes inclusion for 2018 would be $407,143.
2019 Results
During this year, Ms. Hanson will include $150,000 [(5%)($3,000,000)] of interest in her Net
Income For Tax Purposes.
In addition, Ms. Hanson will include the 2018 reserve in income and deduct a new reserve for
2019. The calculations are as follows:
2018 Reserve Added To Income $2,035,714
2019 Reserve - Lesser Of:
• [($2,850,000)($2,000,000 ÷ $4,200,000)] = $1,357,143
• [($2,850,000)(20%)(4 - 1)] = $1,710,000 ( 1,357,143)
Inclusion Rate 1/2
The total Net Income For Tax Purposes inclusion for 2019 would be $489,286 ($150,000 +
$339,286).
2020 Results
During this year, Ms. Hanson will include $100,000 [(5%)($2,000,000)] of interest in her Net
Income For Tax Purposes.
Ms. Hanson will include the 2019 reserve in income and deduct a new reserve for 2020. She
will also deduct the $400,000 required payment to the developer. As this payment is required
by a warranty on a capital asset, this will be a capital loss. The calculations are as follows:

2019 Reserve Added To Income $1,357,143

2020 Reserve - Lesser Of:
• [($2,850,000)($1,000,000 ÷ $4,200,000)] = $678,571
• [($2,850,000)(20%)(4 - 2)] = $1,140,000 ( 678,571)
Capital Loss On Warranty ( 400,000)
Net Capital Gain $ 278,572
Inclusion Rate 1/2
Net Taxable Capital Gain $ 139,286
The total Net Income For Tax Purposes inclusion for 2020 would be $239,286 ($100,000 +
$139,286).
2021 Results
With the bankruptcy of the developer, no interest will be collected in 2021 and the balance of
the loan must be written off as a bad debt, resulting in a capital loss of $1,000,000.
Ms. Hanson will include the 2020 reserve of $678,571 in income. Since the loan was to be
paid off in 2021, there would have been no new reserve to be deducted, regardless of the
bankruptcy.
The net effect of these items is an allowable capital loss of $160,715 [(1/2)($678,571 -
$1,000,000)]. Note that this loss can only be deducted in 2021 to the extent of taxable capital
gains in that year. However, it can be carried back to be applied to the capital gains that were
recognized in previous years.
Summary (Not Required)

The results can be summarized as follows:
Taxable Gain
Year Interest (Allowable Loss)
2018 Nil $407,143
2019 $150,000 339,286
2020 100,000 139,286
2021 Nil ( 160,715)
Totals $250,000 $725,000
This result can be verified as follows:

Warranty Payment ( 400,000)
Bad Debt Loss ( 1,000,000)
Inclusion Rate 1/2
An alternative verification calculation would be as follows:

Down Payment $1,200,000

Payments Received [(2)($1,000,000)] 2,000,000
Warranty Cost ( 400,000)
Total Proceeds Of Disposition $2,800,000
Adjusted Cost Base ( 1,350,000)
Inclusion Rate 1/2
The extra $1 in the summary table is a rounding issue.

During the period 2004 through 2018 (15 years), the condo experienced the larger capital
gain as shown in the following table. To minimize the total capital gain, it should be desig-
nated the principal residence for 14 years. This will completely eliminate the capital gain as
the exemption formula adds an additional year.
This will leave one year for the city home to be designated her principal residence.
The minimum taxable capital gain for 2018 would be calculated as follows:
City Home Condo

Estimated Proceeds Of Disposition $325,000 $304,000
Adjusted Cost Base ( 173,000) ( 131,000)
Anticipated Selling Costs ( 13,500) ( 12,240)
Total Gain $138,500 $160,760
Exemption:
City Home [$138,500][(1 + 1) ÷ 15] ( 18,467)
Condo [$160,760][(14 + 1) ÷ 15] ( 160,760)
Capital Gain $120,033 Nil
Inclusion Rate 1/2 N/A
Taxable Capital Gain $ 60,017 Nil
Note that, when both properties are owned for the same length of time (15 years in this
example), there is no need to calculate an annual gain for each property.


Classification Of Property
All of the items sold are personal use property. However, if they can be classified as "listed
personal property", their tax treatment will be different. Under ITA 54, listed personal prop-
erty consists of the following items.
(i) print, etching, drawing, painting, sculpture, or other similar work of art,
(ii) jewelry,
(iii) rare folio, rare manuscript, or rare book,
(iv) stamp, or
(v) coin.
Personal Use Property

The automobile, boat, and antique clock would be classified as personal use property. As a
consequence, the loss on the boat cannot be recognized. However, capital gains on the other
items would be taxable and are calculated, taking into consideration the $1,000 floor rule, as
follows:
Auto Clock
Proceeds Of Disposition $27,000 $1,700
ACB - Auto ( 25,000)
ACB - Clock, Greater Of
• $800
• $1,000 Floor ( 1,000)
Selling Costs ( 150) ( 50)
Capital Gain $ 1,850 $ 650
As losses on personal use property are not deductible under any circumstances, no consider-
ation is given to the sale of the boat.
Listed Personal Property

The coin collection, rare manuscript, and painting would be classified as listed personal prop-
erty. If a loss occurs on property in this category, it can be deducted against capital gains on
property in this category. Given this, the relevant calculations are as follows:
Coins Manuscript Painting

POD - Manuscript, Greater Of:
• $800
• $1,000 Floor $1,000
ACB - Painting, Greater Of:
• $700
• $1,000 Floor ( 1,000)
Selling Costs ( 50) ( 30) ( 50)
Capital Gain (Loss) ($ 350) ($ 730) $ 50

Summary
The total addition to Net Income For Tax Purposes would be as follows:
Personal Use Property
Gain On Automobile $1,850
Gain On Clock 650
Loss On Boat N/A $2,500
Listed Personal Property
Gain On Painting $ 50
Loss On Listed Personal Property (Note) ( 50) Nil
Net Capital Gains $2,500
Inclusion Rate 1/2
Addition To Net Income For Tax Purposes $1,250
Note The losses on listed personal property total $1,080 ($350 + $730). However,
they can only be deducted to the extent of the gain on listed personal property of $50.
The remaining loss of $1,030 ($1,080 - $50) can be carried over to other years. As is
discussed in Chapter 11, such losses can be carried back 3 years and forward for 7
years.

The taxable capital gain on the sale of securities and the conversion to Canadian dollars would
Capital Gain On Sale Of Securities

Proceeds Of Disposition (€97,000 @ $1.48) $143,560
Adjusted Cost Base (€53,000 @ $1.38) ( 73,140) $70,420
Net Foreign Exchange Gain

Converted Dollars - September (€97,000 @ $1.52) $147,440
Proceeds Of Disposition - March (€97,000 @ $1.48) ( 143,560)
Capital Gain On Foreign Exchange $ 3,880
ITA 39(1.1) Deduction ( 200) 3,680
Total Capital Gains $74,100
Inclusion Rate 1/2
There is a foreign exchange gain under ITA 39(1.1), resulting from the increase in the value of
the euro between March and September. The amount would be $3,880. As Ms. Nobel is an
individual, she is eligible to deduct the first $200 of foreign exchange gains under ITA 39(1.1).
As the securities would be considered capital assets, this net foreign exchange gain of $3,680
would be a capital gain.
Ms. Nobel’s income inclusion would be $37,050.


Minimum Net Rental Income
Minimum net rental income would be calculated as follows:
Rent [($1,900)(9)] $17,100
Less:
Property Taxes ($4,600)
Insurance ( 1,100)
Maintenance And Operating Costs ( 1,850)
Mortgage Interest ( 8,200) ( 15,750)
Income Before CCA $ 1,350
CCA (Note) ( 1,350)
Net Rental Income Nil
Note The maximum CCA would be calculated as follows:

Cost ($235,000 - $85,000) $150,000
Bump Up {[1/2][($392,000 - $112,000) - ($235,000 - $85,000)]} 65,000
Capital Cost For CCA Purposes Only $215,000
CCA Base $107,500
Rate For Class 1 4%
Maximum CCA $ 4,300
Since the problem requires that the minimum rental income (loss) be calculated, CCA has
been deducted. While maximum CCA would be $4,300, a rental loss cannot be created
through the deduction of CCA. As a consequence, the actual CCA deduction is limited to
$1,350, the amount of net rental income before the deduction of CCA.
For individuals, since the calendar year is considered the fiscal year for property income
purposes, there is no adjustment for a short fiscal period in the year of acquisition.
Additional Tax Consequences

As no election was made under ITA 45(2), the usual change in use procedures will be appli-
cable. This will result in taxable capital gains calculated as follows:
Land Building
Proceeds Of Disposition
Land $112,000
Building ($392,000 - $112,000) $280,000
Adjusted Cost Base/Capital Cost
Land ( 85,000)
Building ($235,000 - $85,000) ( 150,000)
Capital Gains $ 27,000 $130,000
Inclusion Rate 1/2 1/2
Taxable Capital Gains $ 13,500 $ 65,000
As it appears that the property was Ms. Houston’s only principal residence during all of the
years that she owned the property, it is likely that this can eliminated through the use of the
principal residence exemption.


In both Cases, since the common shares have been held for more than 185 days, the sales are
qualifying dispositions. In both Cases, the eligible small business corporation common shares
were purchased within 120 days after the end of the year in which the qualifying disposition
took place. As a result, they can be designated as replacement shares.
Case A
The capital gain on the disposition is $214,000 ($585,000 - $371,000). As the cost of the
replacement shares is only $472,000, the permitted deferral would be $172,663
[($472,000 ÷ $585,000)($214,000)].
The adjusted cost base of the replacement shares would be $299,337 ($472,000 - $172,663).
Case B
The capital gain on the disposition is $531,000 ($1,253,000 - $722,000). As the cost of the
replacement shares is greater than the qualifying cost of the proceeds of disposition, the entire
$531,000 capital gain can be deferred.
This would leave the adjusted cost base of the replacement shares at $815,000 ($1,346,000 -
$531,000). Note that the deferral election can be made because the replacement shares were
acquired within 120 days after the end of the year.


Part A
As the insurance proceeds were equal to the capital cost of the building , there is no capital
gain on the building . With respect to the furniture and fixtures, the insurance proceeds were
less than the capital cost of the assets, again resulting in no capital gain. Given this, we can
simply deduct the insurance proceeds from the UCC to arrive at the 2018 figures for
recapture.
Furniture
Building And Fixtures
UCC $113,000 $152,000
Insurance Proceeds ( 850,000) ( 180,000)
Terminal Loss (Recapture Of CCA) ($737,000) ($ 28,000)
The total income inclusion for 2018 would be $765,000 ($737,000 + $28,000). The
$737,000 and $28,000 would be added back to the relevant CCA classes, leaving each of
them with a January 1, 2019 balance of nil.
Part B
For both types of assets, the replacement cost exceeded the amount of recapture recorded in
2018. Given this, the maximum amendment on the building would be the $737,000 in recap-
ture that was recorded in 2018. Similarly, the maximum amendment on the furniture and
fixtures would be the $28,000 that was recorded as recapture on that class in 2018.
The maximum 2019 CCA figures and the January 1, 2020 UCC would be based on the capital
cost of the new assets, reduced by the amount of the amended recapture. The first year rules
would be applicable to both classes. The relevant calculations would be as follows:
Furniture
Building And Fixtures
UCC - January 1, 2019 Nil Nil
Additions
Building ($925,000 - $737,000) $188,000
Furniture And Fixtures
($235,000 - $28,000) $207,000
Deduct: One-Half Net Additions ( 94,000) ( 103,500)
CCA Base $ 94,000 $103,500
CCA - Building [($94,000)(4%)] ( 3,760)
CCA - Class 8 [($103,500)(20%)] ( 20,700)
Add: One-Half Net Additions 94,000 103,500
UCC - January 1, 2020 $184,240 $186,300
Part C
The rules for voluntary dispositions differ from those for involuntary dispositions in two ways:
• In the case of voluntary dispositions, in order to elect under ITA 13(4), the replacement
must occur within the first taxation year after the disposition took place. With involuntary
dispositions, the taxpayer has two years to replace the property. As Farnham Inc. replaced
both types of assets in the year following the disposition, this constraint would not alter
the Part B results.

• In the case of voluntary distributions, ITA 13(4) is only available on real property. This
means that Farnham Inc. would not be able to make the ITA 13(4) election on the Class 8
assets. Because of this, there would be no amendment of the $28,000 in 2018 recapture
that was recorded on these assets.
Since there was no amendment of the recapture on the Class 8 assets, the 2019 CCA on these
assets would be $23,500 [($235,000)(1/2)(20%)], rather than the $20,700 that was recorded
in Part B when the ITA 13(4) election was available. This would result in a January 1, 2020
UCC of $211,500 ($235,000 - $23,500). There would be no change from the Part B results in
the CCA or the UCC of the building .
Part D
If the replacement cost had been $700,000 (less than the 2018 recapture), ITA 13(4) would
not be able to reverse all of the recapture on the building . This is shown in the following
calculation.
January 1, 2018 UCC Of Building $113,000
Deduction:
Lesser Of:
• Capital Cost = $850,000 ($850,000)
• Normal Recapture = $737,000
• Replacement Cost = $700,000 700,000 ( 150,000)
Amended 2018 Recapture On Building ($ 37,000)
The amendment of 2018 recapture would be limited to $700,000, leaving a balance of

$37,000 in the amended 2018 return. In addition, it would leave the UCC of the new building
at nil ($700,000 - $700,000). This means that the 2019 CCA on the building would be nil, as
would be the January 1, 2020 UCC.
In terms of the economics of these calculations, the Company received insurance proceeds of
$850,000, an amount that was $737,000 greater than the $113,000 UCC of the old building .
Since it only reinvested $700,000 of this amount in the new building , the excess $37,000 will
remain in 2018 income as recapture.


Part A - Land
In the Company ’s 2018 tax return a capital gain on the land would be reported as follows:
Capital Gain $635,000
Inclusion Rate 1/2
Taxable Capital Gain - 2018 Tax Return Inclusion $317,500
If the ITA 44(1) election is used in 2019, the amended 2018 capital gain would be $519,000,
the lesser of:
• $635,000 (regular capital gain); and
• $519,000 (the excess of the $772,000 proceeds of disposition for the old land over
the $253,000 cost of the replacement land).
The taxable amount would be $259,500 [(1/2)($519,000)] and this would be included in the
revised 2018 Net Income For Tax Purposes. The original gain of $635,000 would be elimi-
nated in the revised return.
If the ITA 44(1) election is used in 2019, the deemed adjusted cost base of the replacement
land would be calculated as follows:
Actual Cost $253,000
Capital Gain Reversed By Election ($635,000 - $519,000) ( 116,000)
Deemed Adjusted Cost Base Of Replacement Land $137,000
Note that the deemed adjusted cost base of the replacement land has been reduced to the
adjusted cost base of the old land.
Part A - Building
As reported in the Company ’s 2018 tax return, the capital gain and recapture on the building
Inclusion Rate 1/2
Taxable Capital Gain - 2018 Tax Return Inclusion $192,000
Opening UCC $342,000

Deduct Disposition - Lesser Of:
• Capital Cost = $605,000 ( 605,000)
UCC Balance = Recapture - 2018 Tax Return ($263,000)

If the ITA 44(1) election is used in 2019, the amended 2018 capital gain would be nil, the
lesser of:
• $384,000 (regular capital gain); and

• Nil (reflecting the fact that there was no excess of the $989,000 proceeds of disposi-
tion for the old building over the $1,042,000 cost of the replacement building).
Based on this, the deemed capital cost of the replacement building would be calculated as
follows:
Actual Cost $1,042,000
Capital Gain Reversed By Election Under ITA 44(1) ( 384,000)
Deemed Capital Cost Of Replacement Building $ 658,000
This result reflects the capital cost of the old building ($605,000), plus the $53,000
($1,042,000 - $989,000) of additional funds required to purchase the new building .
If the ITA 13(4) election is used in 2019, the amended 2018 recapture would be calculated as
follows:
January 1, 2018 UCC Balance $342,000
Deduction:
Lesser Of:
• Capital Cost = $605,000 $605,000
• Normal Recapture = $263,000
• Replacement Cost = $1,042,000 ( 263,000) ( 342,000)
Recapture Of 2018 CCA (Amended) Nil
These new nil figures for the capital gain and the recapture on the disposition of the old
building will replace the old figures of $384,000 and $263,000 that were included in the orig-
inal 2018 return.
If the ITA 44(1) and ITA 13(4) elections are made, the UCC of the replacement building would
Deemed Capital Cost $ 658,000
Recapture Reversed By Election Under ITA 13(4) ( 263,000)
UCC - Replacement Building $ 395,000
Note that the UCC for the new building is equal to the UCC of the old building ($342,000),
plus the additional $53,000 ($1,042,000 - $989,000) in funds required for its acquisition.
Part A - Equipment
As this is a voluntary disposition, the equipment does not qualify as “former business prop-
erty ” and, as a consequence, neither the ITA 44(1) nor the ITA 13(4) election can be used.
However, as there were no other assets in the class at the end of 2018, there will be a terminal
loss of $13,000 ($127,000 - $114,000). The new equipment has a capital cost equal to its
actual cost of $205,000. This is also equal to the UCC.

Part B - The Election

The preceding result can be improved by using ITA 44(6) to move some of the proceeds of
disposition on the land to the building . However, this is transfer is only useful to the extent of
the $53,000 excess of the $1,042,000 replacement cost of the building over the $989,000
proceeds of disposition on the old building . The results of this transfer would be as follows:
Land Building
Actual Proceeds Of Disposition $772,000 $ 989,000
Optimum Transfer Land To Building ( 53,000) 53,000
Adjusted Proceeds Of Disposition $719,000 $1,042,000
Part B - Application To Land

If both the ITA 44(1) and the ITA 44(6) elections are used, the capital gain on the land will be
the lesser of:
• $582,000 ($719,000 - $137,000); and
• $466,000 (the excess of the $719,000 adjusted proceeds of disposition for the old
land over the $253,000 cost of the new land).
The adjusted cost base of the replacement land is calculated as follows:
Actual Cost $253,000
Capital Gain Reversed By Elections ($582,000 - $466,000) ( 116,000)
Deemed Adjusted Cost Base Of Replacement Land $137,000
Part B - Application To Building

If both the ITA 44(1) and the ITA 44(6) elections are used, the capital gain on the building will
be nil, calculated as follows:
• $437,000 ($1,042,000 - $605,000); and
• Nil (reflecting the fact that there was no excess of the $1,042,000 proceeds of disposi-
tion for the old building over the $1,042,000 cost of the replacement building).
Based on this, the deemed capital cost and UCC of the replacement property would be calcu-
lated as follows:
Actual Cost $1,042,000
Capital Gain Reversed By Elections ( 437,000)
Deemed Capital Cost $ 605,000
Recapture Reversed By ITA 13(4) ( 263,000)
UCC - Replacement Building $ 342,000

Part B - Comparison
The table which follows compares the results of using only ITA 44(1) and ITA 13(4) with the
results that arise when the ITA 44(6) election is also used.
No ITA 44(6) With ITA 44(6)
Capital Gains
Land $519,000 $466,000
Building Nil Nil
Replacement Property
Adjusted Cost Base Of Land $ 137,000 $137,000
Capital Cost Of Building 658,000 605,000
UCC 395,000 342,000
Note that this election is not made without a cost. Had the $53,000 been left as a capital gain,
tax would have applied on only one-half of the total. While we have eliminated this $26,500
in income, we have given up future CCA for the full amount of the $53,000. In other words,
we have given up $53,000 in future deductions in return for eliminating $26,500 of income in
2018.

Self Study Problem Nine - 1

(Moving Expenses)
Mr. Leonard Ho has worked for Quality Construction Ltd. (QCL) for over 15 years. During this
entire period he has been located in the employer’s Regina office. However, in 2018, he
requests a transfer to the firm’s Kelowna office. QCL agrees to this transfer.
For 2018, Leonard’s salary is $12,000 per month. Because he is a highly valued employee,
QCL agrees to pay a moving allowance of $18,000 to cover his general moving costs. In addi-
tion, QCL agrees to negotiate additional payments for any housing loss that arises in Regina, as
well as any additional costs associated with acquiring a new home in Kelowna.
In August, Leonard flies to Kelowna to look for alternative housing . He spends three days in
the city and, after two days, he locates and purchases a residence similar to his Regina prop-
erty at a cost of $427,000. His costs for this trip are as follows:
Airfare $ 872
Rental Car Costs 326
Hotel (3 Nights At $150) 450
Food (3 Days - Total) 175
On his return to Regina, he lists his residence at that location for sale. His original cost for this
residence is $395,000. However, he is anxious to sell and, in early September, he accepts an
offer of $360,000. The closing date is November 1. The new residence in Kelowna will not be
available until December 1.
After some discussion, the employer agrees to fully compensate him for the $35,000 loss on
the sale of his Regina property and, in addition, provide him with an additional allowance of
$15,000 to compensate him for the additional cost of the Kelowna property. The Regina
office will pay the general moving allowance of $18,000. However, the Kelowna office will
provide the additional $50,000 ($35,000 + $15,000) in housing related payments. All of
these amounts will be paid during December, 2018.
The costs associated with the housing transactions are as follows:
Real Estate Commissions $14,400
Legal Fees - Regina Property 625
Unpaid Property Taxes To Date Of Sale 1,200
Cost Of Cleaning And Minor Repairs Prior To Sale 2,650
Legal Fees - Kelowna Property 895
Land Transfer Tax - Kelowna Property 4,600
Leonard continues to work in Regina until November 10th. As his old residence is sold effec-
tive November 1, he, his wife and two children live in a hotel until their departure for Kelowna
on November 11. Expenses during these 10 days were as follows:
Hotel (10 Nights At $250) $2,500
Food (10 Days - Total) 1,750
The drive from Regina to Kelowna requires two days. The trip is 1,375 kilometers.
Leonard and his family arrive in Kelowna on November 13th. As their new home will not be
available until December 1, they live in a hotel until that date. Because of accumulated vaca-
tion time, Leonard does not begin working in Kelowna until December 1.
His expenses for the period November 11 through December 1 are as follows:

Gas For Trip $ 125

Lodging For 2 Nights On The Trip ($225 + $250) 475
Food On The Trip (2 Days - Total) 380
Lodging In Kelowna (18 Nights At $300) 5,400
Food In Kelowna (18 Days - Total) 2,550
Leonard receives a bill from his moving company for $8,500. Of this total, $1,500 is for
storage during the period November 1, 2018, through December 1, 2018.
Leonard will use the simplified method of determining vehicle and food costs in calculating
his moving expenses. Assume that the relevant flat rate for vehicle expenses is $0.46 for
Saskatchewan and $0.50 for British Columbia, and the flat rate for meals is $51 per person per
day.
Leonard would like to take the maximum moving expense deduction for 2018.
Required: Determine the amount of Leonard’s maximum 2018 deduction for moving
expenses. In addition, indicate the amount of any carry forward that is available at the end of
the year.


(Child Care Expenses)
Both Mr. Fortin and Mrs. Fortin are employed. During 2018, Mr. Fortin had opened a restau-
rant and had business income of $8,000. Mrs. Fortin had employment income of $84,000,
mostly from commission sales during 2018. Since Mrs. Fortin’s work required a good deal of
travel away from home and Mr. Fortin’s new restaurant required him to work long hours,
including many evenings, they had to pay for care of their children. Payments for child care
amounted to $400 per week, for a total of 48 weeks.
Also during the current year, there was a period of six weeks during which Mr. Fortin was
hospitalized due to injuries suffered during a game of Ultimate Frisbee. This period was part
of the 48 weeks for which child care payments were made.
Required: Determine the maximum amount that can be deducted by Mr. and Mrs. Fortin for
the year ending December 31, 2018 for child care expenses under the following assumptions:
A. They have two children, neither of whom qualify for the disability tax credit. Their ages
are 2 and 4 years old.
B. They have three children, none of whom qualify for the disability tax credit. Their ages are
2, 4, and 15 years old.


Maureen Hadley and her common-law partner Sue Brendal have three adopted children. At
the end of 2018, their ages are as follows:
• Their daughter Lori is 4 years old.
• Their son Jack is 8 years old and qualifies for the disability tax credit.
• Their son Bob is 14 years old.
None of the children have any income of their own.
Maureen is a very successful accountant with net business income in 2018 of $216,000. Her
partner, Sue Brendal, works on a part time basis in retail. Her 2018 gross employment income
is $24,000. In addition, because she was previously married, she receives child support
payments of $1,200 per month from the father of Lori.
Both Maureen and Sue spend a considerable amount of time at their work and, because of
this, they employ a full time person to care for the children. The cost for this care is $12,480
($260 per week for 48 weeks).
During the four week period in the summer when they do not employ the child care worker,
the children attend a live-in camp. The cost for this camp is $2,000 per week, per child.
In January, 2018, Maureen slipped on an icy sidewalk and broke both of her ankles. As a
consequence of this accident, she spent three weeks in the hospital.
Sue has always been concerned about her lack of formal education. To make progress in this
area, she enrolls in an intensive 5 week accounting course at a designated educational institu-
tion. Class attendance and work in this course require nearly 60 hours per week of Sue’s time.
Required: Determine the maximum amount that can be deducted by Maureen and Sue for
child care costs for the year ending December 31, 2018.


(Pension Income Splitting - No OAS)
John Gupra is 57 years of age. As he began working at an early age for a company with a very
generous pension plan, he retired at age 55. During 2018, he receives payments from this
plan of $64,000. During 2018 he also has net rental income of $23,000. John has no other
sources of income during 2018.
John’s wife Fatima is 45 years of age. For 2018, her only income is $8,400 of interest on her
savings account.
Neither John nor Fatima have any tax credits other than the basic personal credit, spousal
credit, and pension income credit. Further, they have no deductions that will be used in the
determination of Taxable Income.
Required: John would like to split his 2018 pension income with Fatima. Calculate the
maximum amount of 2018 federal tax savings that would result from this tax planning strategy.


(Pension Income Splitting With OAS)
Martin Jones and his wife Sally are both 68 years of age. Sally received OAS payments of
$7,000 during 2018. In addition to her OAS benefits, Sally earns interest of $43,000 during
2018. The investments which provide this interest were inherited from her mother. Because
of a serious accident several years ago, Sally qualifies for the disability tax credit.
During 2018, Martin receives an annual pension benefit from his former employer of
$124,000. This is his only source of income other than the OAS payments described in
Scenario 2 below.
Scenario 1 Martin prepares his and Sally's tax returns and does not split his pension
income. Martin has never applied for OAS payments, thinking that they would simply
be clawed back by the government because of his ongoing high level of income.
Scenario 2 An accountant prepares Martin and Sally's tax returns and splits Martin's
pension income, with $62,000 going into each of their tax returns. Martin applied for
OAS as soon as he turned 65 and received $7,000 in OAS benefits in 2018.
Neither Martin nor Sally are eligible for any tax credits other than the basic personal credit, the
age credit, the pension income credit, and the disability tax credit. Further, they have no
deductions that will be used in the determination of Taxable Income.
Required:
A. Calculate the amount of Net Income For Tax Purposes and Taxable Income for both
Martin and Sally under each of the two Scenarios.
B. Based on your figures from Part A, calculate the amount owing to the CRA for both Martin
and Sally under each of the two Scenarios. Provide a comparison of the amounts owing
under the two alternatives.


(Other Income And Deductions Including RESP)
Harvey Masters is 36 years old. He has custody of his 9 year old son from a previous marriage
and is currently married to a very successful trial lawyer. Her income regularly exceeds
$200,000 per year.
Although he did well selling real estate, Mr. Masters has decided to change careers and
become an accountant. He has been told by trusted sources that it is a lucrative profession
which will permit him to spend much more time with his family while earning an obscene
amount of money.
Mr. Masters commenced studies on a full-time basis at the University of Manitoba in Winnipeg
on January 1, 2018. In June, 2018, after completing his first semester and extra catch up
courses with an A+ average, Mr. Masters and his son moved from Winnipeg to a rented cottage
at Pelican Lake, approximately 200 km from his Winnipeg home.
For the summer, he worked for a real estate firm at Pelican Lake on a part time basis. The total
cost of renting a van and loading it for his move to Pelican Lake was $350.
In August, he returned to Winnipeg in preparation for the September semester. Due to the
increased demand for moving vans, the total cost of renting a van and loading it for his move
back to Winnipeg was $500.
On receipt of an inheritance in February, 2018, Mr. Masters opened a Tax Free Savings
Account (TFSA) and contributed $10,000. At the same time, his wife contributed another
$10,000 to his TFSA. Mr. Masters did not have a TFSA prior to this time.
During 2018, Mr. Masters received the following amounts:
Wages from summer employment 5,400
Scholarship granted by university for September 2018 semester 3,500
Eligible dividends received from Canadian public corporations 2,000
Child support received 6,000
Inheritance 25,000
TFSA withdrawal 13,000
On December 15, 2018, Mr. Masters contributed $5,300 to his 9 year old son’s Registered
Education Savings Plan. Mr. Masters’ parents have contributed to the RESP in the past, but this
is the first year that Mr. Masters has contributed.
Required:
A. Determine the minimum Net Income For Tax Purposes that Mr. Masters will have to report
for his 2018 taxation year. Provide reasons for omitting items that you have not included
in your calculations.
B. Provide any advice you feel would assist him in planning future actions concerning his
son’s RESP.


(Non-Arm’s Length Transfer Of Land)
Mr. Bryant Shaw owns a tract of land which he acquired several years ago at a cost of
$275,000. An appraiser has indicated that it has a current fair market value of $400,000.
As he is planning on moving to a warmer climate, Bryant would like to dispose of this property.
His preference would be to have it transferred to a family member and, to this end, he is
considering the following four alternatives:
A. Gifting the property to his sister Sally. As she is currently living on welfare, it is
likely that she would sell the property immediately to have access to the addi-
tional funds.
B. Selling the property to his mother Sarah for its fair market value. She is not likely
to sell the property in the foreseeable future.
C. Selling the property to his younger brother Bob for $275,000. Bob is attending
university on a full time basis and has no other source of income. Bob would likely
sell the property immediately for its fair market value in order to take advantage of
his current low tax bracket.
D. Selling the property to his older brother Norman for $500,000. Norman would
likely sell the property immediately for its fair market value. Norman plans to use
the resulting loss to offset capital gains that he has realized in the current year.
Required: For each of the alternatives under consideration, advise Bryant of the tax conse-
quences that will result from the disposition. In addition, in those cases where the property is
resold by the transferee, indicate the tax consequences of the sale to that individual.


(Non-Arm’s Length Transfer Of Depreciable Asset)
The following two scenarios involve a non-arm's length transfer of a depreciable asset.
Scenario 1 - FMV Greater Than Capital Cost Martin Bolen owns a depreciable
asset with a fair market value of $87,000. It has a capital cost of $52,000 and a UCC of
$36,000. It is the only asset in its class. He sells the asset to his sister for cash of
$87,000.
Scenario 2 - FMV Less Than Capital Cost Marion Bolen owns a depreciable asset
with a fair market value of $142,000. It has a capital cost of $212,000 and a UCC of
$105,000. It is the only asset in its class. She sells the asset to her brother for cash of
$142,000.
Required: For each of the two scenarios, indicate the tax consequences for the transferor
that result from the sale. In addition, indicate the tax values that will be used by the transferee
subsequent to the transfer.


(Deemed Dispositions At Death Including Disposition Of Land And
Building)
Ms. Samantha Kneebone lives with her common-law partner, Alice. She has a 36 year old son,
Chester. Chester has annual employment income of over $65,000 a year, and has had taxable
capital gains of at least $30,000 for the last three years.
For a number of years, Ms. Kneebone has owned a small apartment building in Regina. The
property was acquired for $452,000, with $122,000 of this amount being attributable to the
land. The building’s cost of $330,000 ($452,000 - $122,000) was allocated to a separate
Class 1. From its date of acquisition through 2017, the building was normally fully occupied.
As of January 1, 2018, the UCC balance for this Class 1 was $234,000.
On July 1, 2018, Ms. Kneebone died as the result of pancreatic cancer. It was estimated that,
on this date, the rental property had a fair market value of $876,000. The estimate allocations
were $425,000 for the land and $451,000 for the building .
In March, 2019, the building is sold for a total price of $784,000, of which $376,000 is allo-
cated to the land and $408,000 to the building .
Required:
A. For each of the following cases, indicate the tax effects to be included in Ms. Kneebone’s
tax return as a result of the 2018 deemed disposition at her death, as well as the tax effects
associated with the 2019 sale of the property.
Case 1 Her will leaves the apartment building to Alice. During 2018, Alice
continues to operate the building and takes maximum CCA for that year.
Case 2 Her will leaves the apartment building to Chester. During 2018, he
continues to operate the building and takes maximum CCA for that year.
B. Assume that in Case 2, the proceeds of the 2019 sale of the property by Chester were allo-
cated $435,000 to the land and $349,000 to the building. Calculate the tax effects
associated with the sale of the property for Chester.


(Income Attribution)
Mr. John Tucker is 45 years old and married to Janet Tucker. On December 31, 2017, their
son, Martin, is 23 years old, while their daughter, Doreen, is 12 years old.
At the end of 2017, John is holding equity securities of a public company with an adjusted cost
base of $85,000 and a fair market value of $123,000. He is considering transferring these
securities to either his wife or to one of his two children. He seeks your advice as to the tax
consequences, both to himself and to the transferee, that would result from such a transfer.
During your discussions, Mr. Tucker has indicated the following:
• The transfer will take place on December 31, 2017.
• Any proceeds he receives from his family on the share transfer will not be invested in
income producing assets.
• He wishes you to assume that the securities would pay eligible dividends during 2018 of
$6,500. The gross up on these dividends will be $2,470 [(38%)($6,500)], resulting in a
taxable amount of $8,970. The federal dividend tax credit would be $1,347
[(6/11)($2,470)].
• Assume that the transferee would sell the securities on January 1, 2019 for $151,000.
Required: Each of the following independent Cases involves a transfer by Mr. Tucker to a
member of his family. Indicate for both Mr. Tucker and the transferee, the 2017, 2018, and
2019 tax effects of:
• the transfer on December 31, 2017,
• the assumed 2018 receipt of the dividends, and
• the assumed 2019 disposition by the transferee.
Case A Mr. Tucker gives the securities to his wife and does not elect out of the provisions of
the ITA 73(1) spousal rollover.
Case B Mr. Tucker’s wife uses money from her savings account to purchase the securities for
their fair market value of $123,000. Mr. Tucker does not elect out of the provisions of the ITA
73(1) spousal rollover.
Case C Mr. Tucker’s wife uses money from her savings account to purchase the securities for
$95,000. Mr. Tucker elects out of the provisions of the ITA 73(1) spousal rollover.
Case D Mr. Tucker gives the securities to his daughter, Doreen.
Case E Mr. Tucker’s son, Martin, uses funds from his stock trading account to purchase his
father’s securities at their fair market value of $123,000.


(Gifts And Income Attribution)
Mrs. Sarah Long , a management consultant, is married with two children. Her son, Barry, is 27
years old and her daughter, Mary, is 13. Mrs. Long has not previously gifted or sold property to
her husband or either of her children.
On April 1 of the current year, Mrs. Long owns the following properties:
Long Consulting Ltd. Mrs. Long owns 100 percent of the voting shares of Long
Consulting Ltd., a Canadian controlled private corporation. These shares have a cost
of $210,000 and a current fair market value of $475,000.
Rental Property Mrs. Long owns a rental building . The building was acquired at a
cost of $190,000. On April 1 of the current year, its UCC is $125,000 and its fair
market value is estimated to be $275,000. Assume the fair market value of the land on
which the building is situated has been $100,000 since the building’s acquisition and
remains at this value for the next 3 years.
Dynamics Inc. Mrs. Long owns 4,000 shares of Dynamics Inc., a Canadian public
company. These shares have a cost of $212,000 and a current fair market value of
$384,000.
Farm Land Mrs. Long owns farm land with a cost of $80,000 and a current fair
market value of $175,000. Mrs. Long’s son, Barry, uses the farm land on a full time
basis to grow various crops.
Mrs. Long is considering giving all or part of the properties to her spouse and/or her two chil-
dren. Assume that each property is sold 2 years after being gifted for $50,000 more than its
fair market value at the time of the gift. Also assume that the recipient of the rental property
does not take CCA prior to the subsequent sale of the property.
Required: For each of the assets, provide the tax consequences if the property is gifted to:
1. her husband and she does not elect out of ITA 73(1).
2. her husband and she does elect out of ITA 73(1).
3. her 13 year old daughter, Mary.
4. her 27 year old son, Barry.
The "tax consequences" should include:
• the income that will be recognized by Mrs. Long at the time of the transfer;
• the tax cost of the asset in the hands of the transferee;
• the tax treatment of any income earned on the asset, including dividends, rental income
or farm income; and
• the income that will be recognized by Mrs. Long and/or the recipient of the gift when the
asset is sold 2 years after it was gifted.
Ignore the possibility that either the lifetime capital gains deduction or the tax on split income
is applicable to any of these transactions. (These provisions are covered in Chapter 11 of the
text.)


Carolyn Hadley is 29 years old and recently divorced. The terms of the 2017 divorce settle-
ment require that her former spouse pay $1,000 per month in child support, as well as $500
per month in spousal support. Because he lost his job in 2018, payments during this year have
totaled only $12,500.
Carolyn has two children. Her younger child, Deborah, is 4 years old. Her older child Mark is
7 years old. Neither child has any income of their own.
Prior to the divorce, the family had lived in property that Carolyn owned in Lethbridge,
Alberta. Prior to 2018, Carolyn had been a stay at home mom with no source of income of her
own. Because she knew her support payments would not provide an adequate amount of
income for her family, she accepted a job in Edmonton, Alberta. Her employment contract
calls for her to begin work on March 1, 2018.
During January, 2018, Carolyn made several house hunting trips to Edmonton. The cost of
these trips was $785. In February, she made an offer on an Edmonton home and it was
accepted. The closing date for the sale is March 10, 2018. Her Lethbridge house was sold,
with a closing date of February 15, 2018.
After the closing on her Lethbridge home, she and her children spent 14 days in a Lethbridge
hotel. The trip to Edmonton was 506 kilometers and took 2 days as she drove very slowly
because she was pulling a trailer. Carolyn stayed overnight with family in Calgary en route.
On arriving in Edmonton, she spent an additional 9 days in hotels prior to her new home
becoming available.
Carolyn will use the simplified method of calculating meal and vehicle costs for the trip to
Edmonton. Assume that the 2018 vehicle rate for Alberta is $0.45 per kilometer and the 2018
rate for meals is $51 per day per person.
The various other costs associated with the real estate transactions and the move to Edmonton
are as follows:
Selling Costs Of Lethbridge Property $12,500
Legal Fees - Sale Of Lethbridge Property 600
Legal Fees - Purchase Of Edmonton Property 450
Storage Costs - February 15 Through March 10 1,400
Cost Of Moving Belongings 7,250
Lodging In Lethbridge After Closing [(14 Days)($175)] 2,450
Lodging In Edmonton Prior To Closing [(9 Days)($200)] 1,800
After moving to Edmonton, Carolyn incurred child care costs of $175 per week for 38 weeks.
Both children spent two weeks during the summer at a camp near Red Deer. The camp cost
$500 per week for each child.
The family ’s 2018 medical and dental expenses were as follows:
Carolyn $1,200
Deborah 4,200
Mark 2,200
Total $7,600

Carolyn’s new employer is a large Canadian public company. Her basic salary is $5,000 per
month and, during 2018, her employer withheld the following amount from her earnings.
EI 858
CPP 2,594
United Way Contributions 600
Her employer makes a matching contribution to her RPP of $2,600.
Her employer provides her with an automobile that the company acquired on April 1, 2018 at
a cost of $42,000. During 2018, she drove the car a total of 46,000 kilometers, of which
38,000 were employment related. The company paid all of the operating costs of the vehicle,
a total of $7,200 during 2018. The car was used by Carolyn from April 1, 2018, through
December 31, 2018.
Her employer provides an allowance for food and lodging while traveling on company busi-
ness. The allowance is $600 per month, a total of $5,400 for the 9 months that Carolyn was
traveling for her employer during 2018. Her actual cost for employment related food and
lodging in 2018 totaled $5,700.
Her employer also provides a moving cost allowance of $10,000. In addition, the employer is
reimbursing Carolyn for the $4,000 loss on the sale of her Lethbridge home, as well as
providing a $7,500 payment to assist with the higher housing costs she has encountered in
Edmonton.
During 2017, Carolyn is given a group of securities by her father. The adjusted cost base of
these securities was $45,000 in the hands of her father. At the time of the gift, their fair market
value was $62,000. During 2018, these securities pay eligible dividends of $5,800. In
December, 2018, Carolyn sells these securities for $74,000.
In June, 2018, Carolyn's mother dies, leaving her with a rental property that has a fair market
value of $320,000, of which $50,000 represents the value of the land. At the time of her
mother's death, the UCC of the building was $240,000 and it was not occupied by a tenant.
Her mother had purchased the property several years ago for $400,000. At the time her
mother acquired the property it was estimated that the value of the land was $100,000.
Carolyn was not able to find a tenant and, in December, 2018, she sells the property for
$340,000. An appraiser indicates that the value of the land at this time is unchanged at
$50,000.
Required: Calculate the following for Carolyn:

• her minimum 2018 Net Income For Tax Purposes,
• her minimum 2018 Taxable Income,
• her minimum 2018 federal Tax Payable.
Ignore GST and HST considerations and any amounts of income tax that would have been
withheld by Carolyn’s employer.


John Winded celebrated his 65th birthday on February 14, 2018. On February 28, 2018, John
retired from Celebrate Ltd., a public corporation, after 35 years of service. John’s annual
remuneration was $84,000. A review of his last pay stub reveals the following deductions:
CPP contributions $700
EI premiums 200
RPP contributions 500
Employee premiums to the company dental and health plan 150
John had the use of a company car for January and February. The car was leased at a monthly
rate of $360. During these two months, Celebrate Ltd. paid the $800 in automobile operating
expenses. John drove a total of 3,000 kilometers, 90 percent of which were personal.
As a token of their appreciation for John’s dedicated service, the company gave him a watch
that cost $700.
Since John wanted to live in the Vancouver area once retired, he asked his employer to
transfer him from their Winnipeg to their Vancouver office, effective January 1, 2018. He
incurred the following expenses related to his move:
October, 2017
Air fare for John and his spouse for trip to Vancouver to find a home $ 900
Hotel for four days in Vancouver for purposes of finding a new home 800
Meals while in Vancouver for purposes of finding a new home 320
Car rental while in Vancouver for purposes of finding a new home 325
December, 2017
Legal fees and land transfer taxes on purchase of new home $ 4,800
January, 2018
Air fare for John and his spouse to Vancouver $ 1,200
Legal fees and commissions on sale of old home (sold in January, 2018) 13,000
Cost of transporting furniture and other household goods
from Winnipeg to Vancouver 4,000
Mr. Winded has kept all of his receipts with respect to his moving costs.
Mr. Winded made sure he acquired the maximum allowable number of shares under the
company stock option plan prior to his retirement date. On February 1, 2018, when the
shares were trading for $11 per share, he acquired 1,500 shares at $8 per share. When the
option was granted, the shares were trading for $7 per share. Mr. Winded sold 1,000 of the
1,500 shares in June, 2018 for $17 per share. Mr. Winded did not own any other shares of
Celebrate Ltd., other than the ones he acquired in February.
Mr. Winded received the following “pension” income for the period March 1 through
December 31:
Old Age Security $ 5,350
Canada Pension Plan 9,600
Pension Income from his company pension plan 44,000
Registered Retirement Income Fund 8,000

Mr. Winded also has a number of investments. During 2018, he received interest income of
$3,478 and eligible dividends from Canadian public corporations of $1,700. He owns shares
of Sail Ltd., a private investment corporation that is controlled by his brother-in-law. During
2018, he received non-eligible dividends from Sail Ltd. of $800.
Mr. Winded owns two rental properties. The information for 2018 is as follows:
Property A Property B
Rental Revenues $ 98,000 $ 62,000
Operating Expenses ( 104,000) ( 54,000)
Net Rental Income (Loss) ($ 6,000) $ 8,000
Class 1 UCC Balance - January 1 $180,000 $210,000

Class 8 UCC Balance - January 1 12,000 16,000
Mr. Winded divested himself of a number of capital assets during 2018:
Description Cost Gross Proceeds

Stamp collection $ 8,000 $ 5,000
Rare book 700 4,200
Furniture 4,800 900
Painting 300 800
Shares of Sail Ltd. (Note 1) 12,000 48,000
Shares of CNR Company Note 2 20,100
Shares of BCE Ltd. Note 2 36,000
Sale of Winnipeg home (Note 3) 140,000 313,000
Sale of Lake Winnipeg cottage (Note 3) 80,000 290,000
Note 1 Sail Ltd. is a private company whose shares do not qualify for the lifetime
capital gains deduction.
Note 2 Mr. Winded’s history of purchases and sales in the shares of Canadian
National Railway (CNR) Company and BCE Ltd. are as follows:
May 1, 2014 purchase 200 CNR shares @ $52 per share
May 1, 2016 sale 400 CNR shares @ $55 per share
May 1, 2018 sale 300 CNR shares @ $67 per share
July 11, 2018 purchase 1,000 BCE shares @ $38 per share
August 1, 2018 sale 1,000 BCE shares @ $36 per share
August 29, 2018 purchase 600 BCE shares @ $39 per share
Note 3 The cottage was acquired in 2003. It was sold for gross proceeds of
$290,000. Mr. Winded incurred $10,000 of selling costs on this property.
The Winnipeg home which was acquired in 2009 was sold for gross proceeds of
$313,000. Mr. Winded incurred selling costs of $13,000 on the sale of his Winnipeg
home.

Mr. Winded has operated a sideline woodworking business for 10 years which he has
continued in Vancouver. For 2018, the details are as follows:
Revenues $38,000
Supplies 16,000
Advertising 1,000
Purchase of a new computer 3,800
Purchase of woodworking equipment 1,600
Purchase of two hand tools 450
Mr. Winded converted his large Vancouver garage to a woodworking shop in December,
2017. The shop occupies 20 percent of the total area of his Vancouver home. His 2018 home
expenses are as follows:
Mortgage interest $4,000
Utilities 3,600
Property taxes 4,500
Home telephone line 700
Insurance 1,400
Maintenance 1,800
As he does not wish to have to report any capital gain or recapture upon its eventual disposi-
tion, Mr. Winded will not claim CCA on the portion of his home that is used in his
woodworking business. The only UCC balance related to his woodworking business as at
January 1, 2018 is the Class 8 UCC balance of $2,400.
Mr. Winded’s spouse, Rachel, is 67 years old. Her 2018 income consists of $7,000 in Old Age
Security, $3,100 from the Canada Pension Plan and $1,400 of eligible dividends that she
received from preferred shares that were given to her as a birthday present in 2017 by her
husband. The shares, which have an adjusted cost base of $27,000, were sold for $31,000 in
2018.
Mrs. Winded is disabled and qualifies for the disability tax credit. In 2018, she incurred
$4,600 in medical expenses, $1,200 of which was reimbursed by Mr. Winded’s dental and
health plan when he was an employee of Celebrate Ltd.
In 2018, Mr. Winded made $3,700 in charitable donations to registered charities.
Mr. and Mrs. Winded would like to use all possible elections, including pension income split-
ting , in order to minimize their combined tax liability.
Required: In determining these amounts, ignore GST, PST and HST considerations.
A. For the 2018 taxation year, calculate Mr. and Mrs. Winded's Net Income For Tax Purposes
and Taxable Income.
B. For the 2018 taxation year, calculate Mr. and Mrs. Winded's Federal Balance Owing Or
Refund (tax plus any social benefits repayment).

SSS Problem Nine - 1


(Moving Expenses)
Yolanda has lived in Regina for most of her life. While she thought she was happily married,
she has discovered that her husband of many years was having two affairs. One with her sister
and the other with her brother. She immediately begins divorce proceedings. She also asks
her employer, a large public company, to be transferred to their Calgary office.
Her employer agrees to this move and, during October, 2018, Yolanda flies to Calgary in order
to locate suitable housing . On her second day in that city, she finds a suitable apartment and
leases it for $2,900 per month beginning December 1. She remains in Calgary for an addi-
tional three days in order to find furnishings for the unit. The costs associated with this trip are
as follows:
Air Fare - Return $765
Rental Car Costs (5 Days) 385
Hotel (5 Nights At $225) 1,125
Food (5 Days - Total) 280
As part of the divorce settlement, Yolanda received the family residence. She sells it in
November, 2018 for $327,000. She uses $212,000 of the proceeds to pay off the existing
mortgage on the property. Because of her desire for a very quick sale, she sells the house for
$30,000 less than her cost. Costs associated with the sale are as follows:
Real Estate Commissions $16,350
Legal Fees 425
Unpaid Property Taxes To Date Of Sale 1,100
Cost Of Cleaning And Minor Repairs Prior To Sale 2,750
In order to clean up various business and personal issues, she remains in Regina for 7 days
subsequent to the sale of the house. On November 16, Yolanda leaves for Ottawa by air. As
her new apartment does not become available until December 1, she spends the next 14 days
in a hotel in Calgary.
Her expenses for the period November 9 through December 1 are as follows:
Hotel In Regina (7 Nights At $160) $9,100
Food In Regina (7 Days - Total) 410
Air Fare - One Way 400
Hotel In Calgary (14 Nights At $215) 3,010
Food In Calgary (14 Days - Total) 950
Yolanda contracts a car moving company to transport her car to Calgary and it is delivered on
November 17. The cost for this service is $500.
A moving company takes care of moving Yolanda's personal belongings to Calgary. The
invoice for this service is $2,800, In addition, there is a $900 charge for storing these belong-
ings until the Calgary apartment becomes available.

Yolanda begins working at the new location on December 1, 2018. Her salary is $7,500 per
month, with the first 11 months of 2018 being paid by the Regina office, the remaining one
month being paid by the Calgary office.
Yolanda's employer has agreed to the following to provide assistance with the move:
• They will provide her with a $12,000 allowance to cover her general moving costs.
• They will compensate her for $20,000 of the loss on the sale of her Regina home.
All of these amounts will be paid by the Calgary office during December, 2018.
Yolanda will use the simplified method of determining food costs in calculating her moving
expenses. Assume that the flat rate for meals is $51 per day.
Required: Determine the amount of Yolanda’s maximum 2018 deduction for moving
expenses. In addition, indicate the amount of any carry forward that is available at the end of
the year.


Mr. and Mrs. Harris have four children and, at the end of 2018, their ages are 5, 10, 12, and
15. The 15 year old child has a prolonged physical handicap, which qualifies him for the
disability tax credit.
Mrs. Harris is a stockbroker and had 2018 salary and commissions of $263,500. Mr. Harris is
involved in a travel business and, due to some bad strategic decisions, his share of the earnings
of this business for the year ending December 31, 2018 amounts to only $4,200. In addition
to his business earnings, Mr. Harris has interest income for 2018 of $12,500.
As both spouses must spend considerable time at work, full time child care is required. As a
consequence, their payments for child care amount to $250 per week for 49 weeks of the year.
With respect to the other three weeks, all of the children attend a summer camp with a special
program for the disabled during the month of June. The cost of this camp is $3,000 per child,
or a total of $12,000 for the three weeks.
In February, 2018, Mr. Harris fell off a chair lift while skiing and was in the hospital for a period
of four weeks.
In late September, 2018, Mrs. Harris is convicted of insider trading activities and sentenced to
six months in prison. She immediately begins serving the sentence and spends the last 12
weeks of 2018 in jail.
Required: Determine the maximum amount that can be deducted by Mr. and Mrs. Harris
for child care costs for the year ending December 31, 2018.


(Pension Income Splitting - No OAS)
Harry Cheung is 67 years of age. He was a long-term employee of a Canadian public company
that sponsored a very generous registered pension plan. Now that he has retired, he is
receiving an annual pension benefit of $92,000 per year. Since his retirement, he has
continued to work on a part time basis as a consultant. For 2018, his net income from his
consulting work was $41,000. Harry has not applied to receive OAS payments.
Harry ’s wife Loretta is 63 years of age. She has never worked outside the home and, for 2018,
her only income is interest of $2,800 on term deposits.
Neither Harry nor Loretta have any tax credits other than the basic personal credit, spousal
credit, age credit, and pension income credit. Further, they have no deductions that will be
used in the determination of Taxable Income.
Harry will split his 2018 pension income with Loretta on a 50:50 basis.
Required: Calculate the amount of 2018 federal tax savings that would result from the
pension income splitting .


(Non-Arm’s Length Transfer Of Shares)
John Bolton owns 5,000 shares of Marker Manufacturing Ltd., a Canadian public company.
These shares were purchased three years ago, at a price of $45 per share. They are currently
trading at $105 per share.
John is planning to transfer these shares to his 35 year old brother, Alex Bolton, who will imme-
diately sell them at their fair market value of $105 per share. John is considering four
alternatives for the transfer:
A. The 5,000 shares are sold to Alex Bolton at a price of $75 per share.
B. The 5,000 shares are sold to Alex Bolton at a price of $125 per share.
C. The 5,000 shares are sold to Alex Bolton at a price of $105 per share.
D. The 5,000 shares are given to Alex Bolton as a gift.
Required: For each of these four alternatives, determine the effect on Net Income For Tax
Purposes of John Bolton and Alex Bolton for the current year. Include in your solution the
adjusted cost base that will apply for Alex Bolton.


(Non-Arm’s Length Transfer Of Depreciable Asset)
The following two independent cases involve a non-arm's length transfer of a depreciable
asset.
Case One Jason Lasarge owns a depreciable asset with a fair market value of
$255,000. It has a capital cost of $187,000 and a UCC of $145,000. It is the only
asset in its class. He sells this asset to his brother for cash of $255,000.
Case Two Christine Drummond owns a depreciable asset with a fair market value
$320,000. It has a capital cost of $520,000 and a UCC of $240,000. It is the only
asset in its class. She sells the asset to her sister for cash of $320,000.
Required: For each of the two cases, indicate the tax consequences for the transferor that
result from the sale. In addition, indicate the tax values that will be used by the transferee
subsequent to the transfer.


(Deemed Dispositions At Death)
Years ago, Mr. Forsyth purchased a small apartment building at a cost of $350,000. Of the
total cost, $100,000 was allocated to the land with the $250,000 balance going to the
building . At the beginning of 2018, the UCC of the building was $170,000.
On October 10, 2018, Mr. Forsyth is killed in an automobile accident. At the time of his death,
the fair market value of the land was $212,000 and the fair market value of the building was
$325,000.
In February of 2019, the building is sold for a total price of $600,000, of which $225,000 is
allocated to the land and $375,000 to the building .
Required: Indicate the tax effects to be included in Mr. Forsyth’s tax return as a result of the
2018 deemed disposition at his death and calculate the tax effects associated with the 2019
sale of the building in both of the following Cases:
Case A His will leaves the apartment building to his 23 year old daughter, Eileen.
During 2018, she continues to operate the building and takes maximum CCA for that
year.
Case B His will leaves the apartment building to his wife, Christine. During 2018,
she continues to operate the building and takes maximum CCA for that year.


(Income Attribution - Use Of Loans)
During the current year, Mr. Langdon makes a non-interest bearing loan of $100,000 to his
wife, who acquires a $100,000 bond with the proceeds. He also makes a non-interest bearing
loan of $100,000 to both of his children:
• Pat, aged 15, who uses the funds to acquire a $100,000 bond, and
• Heather, aged 23, who uses the funds as a down payment on her principal residence.
Without this loan she would have paid mortgage interest of $6,000 during the year.
During the year, the bonds acquired by Mr. Langdon’s spouse pay interest of $5,000. The
bonds acquired by Pat pay interest of $5,500.
Required: Determine the amount of income that will be attributed to Mr. Langdon for the
current taxation year as the result of the non-interest bearing loans.


(Gifts And Income Attribution)
Mr. Goodby, a self-employed contractor, is married and has two children. His son, Harry, is 25
years old and his daughter, Martha, is 14. Mr. Goodby has not previously gifted or sold prop-
erty to his spouse or either of his children.
At the end of the current year, Mr. Goodby owns the following property:
Farm Land Mr. Goodby owns farm land that cost $160,000 and has a current fair
market value of $350,000. Mr. Goodby ’s son, Harry, uses the farm land on a full time
basis to grow various crops.
DRC Ltd. Mr. Goodby owns 5,000 shares of DRC Ltd., a Canadian public company.
These shares have a cost of $320,000 and a current fair market value of $573,000.
Rental Property Mr. Goodby owns an apartment building . The building was
acquired at a cost of $380,000, including an estimated value for the land of $124,000.
At the end of the current year, the UCC of the building is $178,000 and its fair market
value is $510,000, including an unchanged value for the land of $124,000.
Goodby Construction Company Mr. Goodby owns 100 percent of the voting
shares of Goodby Construction Company, a Canadian controlled private corporation.
These shares have a cost of $227,000 and a current fair market value of $452,000.
Goodby Construction is not a qualified small business corporation for purposes of the
lifetime capital gains deduction.
Mr. Goodby is in poor health and is considering giving all or part of the properties to his spouse
and/or his two children.
Required: You have been hired as a tax consultant to Mr. Goodby. He would like a report
that would detail, for each of the four properties, the tax consequences to him of making a gift
of the item to his wife or to either one of his children. Your report should include:
• the tax consequences to Mr. Goodby at the time of the gift;
• the tax cost of the properties to the recipient of the gift;
• the tax treatment of any income on the property subsequent to the gift; and
• the tax consequences that would result from a subsequent sale of the gifted property at
$40,000 more than its fair market value at the time of the gift (assume that there is still no
change in the value of the land).
In preparing your answer, assume that Mr. Goodby does not elect out of ITA 73(1) when the
gifts are made. Assume that the recipient of the rental property does not take CCA prior to the
subsequent sale of the property.

SSS Solution Nine - 1

Income At New Location
As both the general moving allowance and the compensation for the housing loss were paid for
by the Calgary office, these would likely be considered income at the new location. Given this
view, Yolanda's employment income at the new location can be calculated as follows:
General Moving Allowance $12,000

Compensation For Loss On Regina Residence (Note 1) 2,500
Salary At New Location (1 Month) 7,500
Total Employment Income At New Location $22,000
Note 1 Under ITA 6(20), one-half of any housing loss reimbursement in excess of
$15,000 must be included in income. As the total reimbursement was $20,000, the
inclusion would be $2,500 [(1/2)($20,000 - $15,000)].
Deductible Expenses
Deductible moving expenses can be calculated as follows:
Real Estate Commission - Regina Home $16,350
Legal Fees - Regina Home 425
Other Regina Home Costs (Not Deductible) Nil
Car Moving Costs 500
Moving Company Costs ($2,800 + $900) 3,700
Costs Of Lodging (Note 2):
House Hunting Trip (3 Nights At $225) 675
In Calgary (12 Nights At $215) 2,580
Food - Maximum (15 Days At $51 Flat Rate) 765
Costs Of Airfare On Move To Calgary 400
Moving Expense Deductions Available $25,395
Note 2 Costs for food and lodging at or near an old or new residence are limited to a
maximum period of 15 days. As soon as the lease is signed (assuming that the person
doesn’t back out before the lease actually begins) the premises is a new residence.
Yolanda has a total of 24 days; 3 days after she signs the lease in Calgary at $225 per
day, 7 days in Regina at $160 per day, and 14 days in Calgary at $215 per day.
As they are the most expensive days, she will deduct the first 3 days in Calgary at $225
per day for a total of $675 [(3)($225)], followed by the remaining 12 days in Calgary at
$215 per day. The total here is $2,580 [(12)($215)].
Actual Deduction
The actual 2018 deduction will be limited to $22,000, the amount of income earned at the
new location. This will leave a carry forward to 2019 of $3,395 ($25,395 - $22,000).


The deductible actual costs are as follows:
Actual Costs Excluding Camp Costs (49 weeks At $250) $12,250
Periodic Cost Limit For Camp Weeks
[($125)(2)(3 weeks) + ($200)(1)(3 weeks) + ($275)(1)(3 weeks)] 2,175
Deductible Actual Costs $14,425
Generally, the spouse with the lower income must claim the deduction for child care
expenses. However, under certain circumstances, the spouse with the higher income can
claim the deduction.
One of these circumstances is when the lower income spouse is hospitalized. In this case, the
higher income spouse can claim the deduction for the period of hospitalization. Thus, for the
four weeks that Mr. Harris was hospitalized, Mrs. Harris can claim child care costs.
The relevant calculations for determining the deductible costs for each individual are as
follows:
Mrs. Harris Mr. Harris
Actual Costs And Limited Camp Costs $14,425 $14,425
Annual Expense Limit
[($5,000)(2) + ($8,000)(1) + ($11,000)(1)] $29,000 $29,000
2/3 Of Earned Income
[(2/3)($263,500)] $175,667
[(2/3)($4,200)] $2,800
Periodic Expense Limit [($125)(2)(4 weeks)
+ ($200)(1)(4 weeks) + ($275)(1)(4 weeks)] $2,900 N/A
The least of these amounts for Mrs. Harris is $2,900. You should note that there is no require-
ment that actual payments be allocated on the basis of the time that Mr. Harris was
hospitalized.
The lowest figure for Mr. Harris is $2,800, two-thirds of his earned income. As Mrs. Harris will
be deducting $2,900, Mr. Harris will not be able to deduct any amount of child care costs.
Note that the interest received is not included in Mr. Harris’ earned income.


Net And Taxable Income
Harry's Income No Split With Split

Pension Receipt $ 92,000 $92,000
Consulting Fees 41,000 41,000
Pension Income To Loretta N/A ( 46,000)
Net And Taxable Income $133,000 $87,000
Loretta's Income No Split With Split

Interest Income $2,800 $ 2,800
Pension Income From Harry N/A 46,000
Net And Taxable Income $2,800 $48,800
Federal Tax Payable With No Pension Income Splitting
Loretta Loretta's federal Tax Payable with no pension income splitting would be calculated
as follows:
Tax Before Credits [(15%)($2,800)] $ 420
Basic Personal Credit [(15%)($11,809)] ( 1,771)
Federal Tax Payable - Loretta Nil
Harry Harry's federal Tax Payable with no pension income splitting would be calculated as
follows:
Tax On First $93,208 $16,544
Tax On Next $39,792 ($133,000 - $93,208) At 26% 10,346
Total Before Credits $26,890
Credits:
Basic Personal ($11,809)
Spousal ($11,809 - $2,800) ( 9,009)
Age [$7,333 - (15%)($133,000 - $36,976) Nil
Pension ( 2,000)
Total ($22,818)
Rate 15% ( 3,423)
Federal Tax Payable - Harry $23,467

Federal Tax Payable With Pension Income Splitting
When pension income splitting is used, Loretta’s federal Tax Payable would be calculated as
follows:
Tax On First $46,605 $6,991
Tax On Next $2,195 ($48,800 - $46,605) At 20.5% 450
Credits:
Pension ( 2,000)
Total ($13,809)
Rate 15% ( 2,071)
Federal Tax Payable - Loretta $5,370
With pension income splitting , Henry's federal Tax Payable would be calculated as follows:
Tax On First $46,605 $ 6,991

Tax On Next $40,395 ($87,000 - $46,605) At 20.5% 8,281
Credits:
Spousal Nil
Age [$7,333 - (15%)($87,000 - $36,976) Nil
Pension ( 2,000)
Total ($13,809)
Rate 15% ( 2,071)
Federal Tax Payable - Harry $13,201
Comparison
Federal Tax Payable Without Income Splitting (Harry Only) $23,467

Federal Tax Payable With Income Splitting ($5,370 + $13,201) ( 18,571)
Savings With Pension Income Splitting $ 4,896


A. Sale For $75 Per Share
In this Case, the shares were transferred at a price that was below fair market value. However,
John Bolton will have deemed proceeds under ITA 69(1)(b) equal to the fair market value of
$525,000 [(5,000)($105)]. The result for John would be as follows:
Deemed Proceeds Of Disposition - ITA 69(1)(b) $525,000
Adjusted Cost Base [(5,000)($45)] ( 225,000)
Inclusion Rate 1/2
Taxable Capital Gain $150,000
From the point of view of Alex Bolton, his cost base for the shares will be limited to the actual
price paid of $375,000 [(5,000)($75)]. This means that, when Alex Bolton sells these shares,
the difference between his proceeds of disposition per share of $105 and the price per share
he paid of $75 would be taxed in his hands. In effect, any gain arising from a sales price of up
to $105 will be subject to double taxation.
With respect to the subsequent sale by Alex, the results for him would be as follows:
Proceeds Of Disposition (Actual) $525,000
Adjusted Cost Base (Actual) ( 375,000)
Inclusion Rate 1/2
B. Sale For $125 Per Share

In this situation, the gain to be recorded by John Bolton would be based on $625,000
[(5,000)($125)], the actual amount received. The result for John would be as follows:
Inclusion Rate 1/2
From the point of view of Alex Bolton, ITA 69(1)(a) would limit his adjusted cost base to
$525,000, the fair market value of the shares at the time of purchase, despite the fact that John
had to record the actual proceeds of $625,000. With respect to the subsequent sale by Alex,
the results for him would be as follows:
Adjusted Cost Base - ITA 69(1)(a) ( 525,000)
Capital Gain Nil
As was the situation in Case A, Case B involves double taxation. In this case it applies to the
extra $100,000 ($625,000 - $525,000) in proceeds of disposition that is recognized in John's
gain but not in Alex's adjusted cost base.

C. Sale For $105 Per Share

In this Case, both the proceeds to John Bolton and the adjusted cost base to Alex Bolton will
be equal to the amount paid for the shares as it is the fair market value. No double taxation will
arise. The result for John would be the same as for Case A as follows:
Inclusion Rate 1/2
Adjusted Cost Base (Actual) ( 525,000)
Capital Gain Nil
D. Gift
In this Case, John Bolton will be deemed to have received proceeds equal to the fair market
value of $525,000 and the adjusted cost base to Alex Bolton will also be equal to the fair
market value. No double taxation will arise. The results will be the same as in Case C.
The result for John would be as follows:
Deemed Proceeds Of Disposition - ITA 69(1)(b) $525,000
Inclusion Rate 1/2
Adjusted Cost Base - ITA 69(1)(c) ( 525,000)
Capital Gain Nil
Summary
These results can be summarized as follows:
Taxable Capital Gain
John Alex Total
A. Sale For $75 (ACB = $375,000) $150,000 $75,000 $225,000
B. Sale For $125 (ACB = $525,000) 200,000 Nil 200,000
C. Sale For $105 (ACB = $525,000) 150,000 Nil 150,000
D. Gift (ACB = $525,000) 150,000 Nil 150,000
The real economic gain on the two sales is $300,000 ($525,000 - $225,000), a taxable
amount of $150,000. This is reflected in Cases C and D where John either sells the shares at
fair market value or gifts them to his brother Alex. The preceding table reflects the fact that
there was double taxation in Cases A and B, resulting in higher taxable capital gains.


Case One - FMV > Transferor's Capital Cost
As a result of this disposition, Jason will have a taxable capital gain of $34,000 [(1/2)($255,000
- $187,000)]. In addition, there will be recapture of $42,000 ($187,000 - $145,000). Jason's
Net Income For Tax Purposes will increase by $76,000 ($34,000 + $42,000).
For capital gains purposes, the capital cost for his brother will be the transfer price of
$255,000. However, because the fair market value of the asset was greater than its capital
cost at the time of transfer, ITA 13(7)(e) will limit the capital cost for CCA and recapture
purposes to the following amount:
[$187,000 + (1/2)($255,000 - $187,000)] = $221,000
Case Two - FMV < Transferor's Capital Cost

As a result of this disposition, Christine will have recapture of $80,000 ($320,000 - $240,000)
and her Net Income For Tax Purposes will increase by this amount. As the capital cost of the
asset was greater than the proceeds of disposition, there will not be a capital gain on the
transfer.
In this Case, where the fair market value of the asset is less than its capital cost, ITA 13(7)(e)
deems the transferee's capital cost of the transferred asset to be equal to the transferor's
capital cost, an amount of $520,000. This capital cost will be used for purposes of deter-
mining any capital gain and/or recapture on a future disposition.
The $200,000 ($520,000 - $320,000) difference between this value and the transfer price
will be considered deemed CCA. The resulting UCC balance of $320,000 ($520,000 deemed
capital cost - $200,000 deemed CCA) will be used by Christine's sister for calculating future
CCA.


Case A
As the transfer was to his daughter, the deemed proceeds will be recorded at fair market value
for the land and building . Based on this, the following calculations show the tax effects that
will be included in Mr. Forsyth’s final return:
Land Building
Deemed Proceeds $212,000 $325,000
Adjusted Cost Base/Capital Cost ( 100,000) ( 250,000)
Capital Gain $112,000 $ 75,000
Taxable Capital Gain $ 56,000 $ 37,500
UCC $170,000
• Capital Cost = $250,000
• Deemed Proceeds = $325,000 ( 250,000)
Negative Closing UCC Balance = Recaptured CCA ($ 80,000)
A total of $173,500 ($56,000 + $37,500 + $80,000) would be added to Mr. Forsyth’s 2018
Net Income For Tax Purposes.
With respect to his daughter’s tax records, the land will have an adjusted cost base of
$212,000. In addition, the building will be a Class 1 asset with a capital cost of $325,000. In
calculating the 2018 CCA, two things should be noted:
• ITA 13(7)(e) does not apply to deemed dispositions resulting from the death of a taxpayer.
This provision normally limits the UCC for the acquiring taxpayer to the selling taxpayer's
capital cost, plus one-half of the difference between the proceeds of disposition and the
taxpayer's capital cost.
• Since the acquisition of the building is a non-arm’s length transaction and its previous use
was to produce income, it is exempt from the half-year rules.
Given these consideration, the 2018 CCA will be $13,000 [($325,000)(4%)], leaving a UCC of
$312,000 ($325,000 - $13,000).
Using this information, the 2019 tax effects associated with the sale of the building would be
calculated as follows:
Land Building
Capital Gain $ 13,000 $ 50,000
UCC $312,000

A total of $44,500 ($6,500 + $25,000 + $13,000) would be added to the 2019 Net Income
For Tax Purposes of Mr. Forsyth’s daughter.
Case B
Assuming that the transfer was to Mr. Forsyth’s spouse rather than to his daughter, his proceeds
of disposition would be equal to the tax cost of the land and building . As a consequence, there
would have been no tax effects to be included in Mr. Forsyth’s final return.
The land, because it is a non-depreciable asset, would be recorded by Christine at its original
adjusted cost base of $100,000. With respect to the building , for purposes of determining
capital gains and losses, Christine would retain Mr. Forsyth's original capital cost of $250,000.
However, for CCA and recapture purposes, Christine would use Mr. Forsyth's UCC of
$170,000.
During 2018, Christine will take CCA of $6,800 [(4%)($170,000)], leaving a January 1, 2019
UCC of $163,200.
Using these figures, the tax consequences from Christine's sale of the land and building would
be as follows:
Land Building
Capital Gain $125,000 $125,000
UCC At Sale $163,200

A total of $211,800 ($62,500 + $62,500 + $86,800) would be added to the 2019 Net Income
For Tax Purposes of Mr. Forsyth’s wife.
Comparison Case A And Case B (Not Required)

The overall tax consequences in the two cases are the same as shown in the following table:
Case A Case A Case B
Mr. Forsyth Eileen Mrs. Forsyth
2018 $173,500 Nil Nil
2018 - CCA Taken ($13,000) ($ 6,800)
2019 44,500 211,800
Net Income For Tax Purposes $173,500 $31,500 $205,000
Mr. Forsyth and Eileen’s increase in Net Income For Tax Purposes total $205,000 ($173,500 +
$31,500), the same amount as the total increase for Mrs. Forsyth.


The general income attribution rules in ITA 74.1 apply to spouses, common-law partners, and
non-arm’s length individuals who are under 18 years of age. This means that the income on
the bonds acquired by Mr. Langdon’s wife and his 15 year child Pat would be attributed to
him. The total amount would be $10,500 ($5,000 + $5,500).
A different income attribution rule, ITA 56(4.1) applies to loans made to any related party, if
the loan is made for the purpose of producing property income. As the loan to Heather was
not used to produce income, this attribution rule would not apply.


Farm Land - Gift To Spouse
In the case of the farm land, if he does not elect out of ITA 73(1) there will be no tax conse-
quences at the time of the transfer.
The tax cost to his spouse will be unchanged from his tax cost of $160,000.
Any income generated by the farm would be considered business income rather than property
income. This means that it will not be subject to the income attribution rules and will be taxed
in the hands of Mr. Goodby ’s spouse.
In the event of a subsequent sale for $390,000 ($40,000 more than its fair market value at the
time of the gift), the following taxable capital gain would be attributed to Mr. Goodby under
ITA 74.1(1):
Inclusion Rate 1/2
Farm Land - Gift To Children

ITA 73(3) permits the transfer of farm property used by the taxpayer or his family to a child on a
tax free basis. This means that Mr. Goodby would incur no taxation at the time of the gift to
either child and the adjusted cost base to either child would be the cost of $160,000.
Any income generated by the farm would be considered business income rather than property
income. This means that it will not be subject to the income attribution rules and will be taxed
in the hands of Mr. Goodby ’s children.
If the property were later sold by Harry for $390,000, the resulting capital gain would not be
attributed back to Mr. Goodby. However, if the property is transferred to Martha and she sells
the property for $390,000 ($40,000 more than its fair market value at the time of the gift) prior
to reaching age 18, a capital gain of $230,000 ($115,000 taxable amount) would be attrib-
uted back to Mr. Goodby. Note that, while there is usually no attribution of capital gains from
minor children, there is an exception to this when farm property is transferred on a tax free
basis.
DRC Ltd. - Gift To Spouse

These shares could be given to Mrs. Goodby with no immediate tax consequences.
The tax cost to his spouse will be unchanged from his tax cost of $320,000.
Any dividends on the shares will be attributed back to Mr. Goodby.
If his spouse sells the shares for $613,000 ($40,000 more than their fair market value at the
time of the gift), the attribution rules of ITA 74.1(1) would require that the following be allo-
cated to the income of Mr. Goodby:
Inclusion Rate 1/2

DRC Ltd. - Gift To Children

In the case of a transfer to either of his children, ITA 69 would require that the gift be treated as
a deemed disposition with the proceeds at the fair market value of $573,000. This would
result in an immediate taxable capital gain of $126,500 [(1/2)($573,000 - $320,000)].
The tax base to either of the children would be the fair market value of $573,000.
If the shares were gifted to his 14 year old daughter Martha, any dividends on the shares would
be attributed back to Mr. Goodby. This would not be the case with a gift to his 25 year old son
Harry.
If the shares were sold by either child for $613,000, there would be no tax consequences for
Mr. Goodby. However, the selling child would have a taxable capital gain of $20,000
[(1/2)($613,000 - $573,000)].
Rental Property - Gift To Spouse

Here again, ITA 73(1) would permit a tax free transfer to Mrs. Goodby with no immediate tax
consequences.
The tax cost of the property would not be changed. The capital cost would remain at
$256,000 ($380,000 - $124,000) and the UCC would be unchanged at $178,000.
Any income on the property while it is held by his spouse would be attributed back to Mr.
Goodby.
At the time of the gift, the fair market value of the building was $386,000 ($510,000 -
$124,000). At the time of a subsequent sale of the property by Mrs. Goodby for $426,000
($40,000 more than its $386,000 fair market value at the time of the gift), the income attribu-
tion rules of ITA 74.1(1) would apply. This would result in the following amounts being
attributed to Mr. Goodby at that time:
Land Building
Capital Gain Nil $170,000
Inclusion Rate N/A 1/2
Taxable Capital Gain Nil $ 85,000
Capital Cost $256,000

UCC ( 178,000)
Recapture Of CCA $ 78,000
Rental Property - Gift To Children

There is no exemption from the general rules of ITA 69 for transfers of depreciable property to
children. As a consequence, Mr. Goodby would be subject to taxation based on a disposition
of the property at its fair market value of $510,000. There would be no capital gain on the
Land. However, there would be a taxable capital gain of $65,000 on the building
[(1/2)($386,000 - $256,000)]
The capital cost of the building to either of the children for capital gains purposes would be
$386,000. For CCA and recapture purposes, the value would be limited to $321,000
[$256,000 + (1/2)($386,000 - $256,000)].

Any rental income on the property while it is held by his 14 year old daughter would be attrib-
uted back to Mr. Goodby until she reached 18 years of age. This would not be the case if the
gift were to his 25 year old son.
There would be no attribution of capital gains on a gift to either child. If the children subse-
quently sold the property for $550,000 ($510,000 + $40,000), there would be a taxable
capital gain of $20,000 [(1/2)($426,000 - $386,000)] that would be taxed in their hands. As
the value of the land remained at $124,000, there would be no capital gain or loss on the land.
Goodby Construction Company - Gift To Spouse

Here again, ITA 73(1) permits transfers of any capital property to a spouse without incurring
taxation at the time of transfer. This means that the shares in Goodby Construction Company
could be gifted to Mrs. Goodby with no immediate tax consequences.
The tax basis for these shares would remain at his cost of $227,000.
Any dividends on the shares will be attributed back to Mr. Goodby.
Should Mrs. Goodby subsequently sell these shares for $492,000 ($40,000 more than its fair
market value at the time of the gift), the following taxable capital gain would be attributed
back to Mr. Goodby under the general rules of ITA 74.1(1):
Proceeds (Fair Market Value) $492,000

Inclusion Rate 1/2
Goodby Construction Company - Gift To Children

There is no exemption from the general rules of ITA 69 for transfers of shares in a Canadian
controlled private corporation to children. As a consequence, Mr. Goodby would have a
taxable capital gain on the transfer to either child of $112,500 [(1/2)($452,000 - $227,000)].
The adjusted cost base to the children would be the fair market value of $452,000.
Note To Students On Gift To Martha Because dividends paid by private companies
to individuals who are under 18 are subject to the tax on split income, such dividends
would not be attributed back to Mr. Goodby. However, the tax on split income is not
covered until Chapter 11 of the text. Given this, you would not have been expected to
understand this issue at this point in the text.
There would be no income attribution if the shares were gifted to his 25 year old son.
If the shares were subsequently sold for $492,000 by the child receiving the gift, that child
would have a taxable capital gain of $20,000 [(1/2)($492,000 - $452,000)] that would be
taxed in their hands.

Self Study Problem Ten - 1

(Calculation Of PAs And PSPAs)
Each of the following four independent Cases involves the calculation of the Pension Adjust-
ment (PA) or Past Service Pension Adjustment (PSPA) that would be reported by the employer.
Case A Mrs. Anderson’s employer sponsors both a money purchase RPP and a DPSP.
She is a member of both. During 2018, the employer contributes, on her behalf,
$2,200 to the RPP and $1,500 to the DPSP. Mrs. Anderson contributes $1,800 to the
RPP. Mrs. Anderson’s employment earnings for 2018 are $80,000.
Calculate her 2018 PA.
Case B Mr. Block’s employer sponsors a defined benefit RPP and, during 2018,
contributes $2,900 on Mr. Block’s behalf. Mr. Block also contributes $2,900 to the
plan in 2018. The plan provides a benefit equal to 1.75 percent of pensionable earn-
ings for each year of service. Mr. Block’s pensionable earnings for 2018 are $45,000.
Calculate his 2018 PA.
Case C Miss Carr has worked for her current employer since 2016. In January,
2018, this employer institutes a defined benefit RPP, with benefits extended for all
years of service prior to the inception of the plan. The benefit formula calls for a retire-
ment benefit equal to 1.25 percent of pensionable earnings for each year of service.
In the current and both previous years, Miss Carr’s pensionable earnings were
$38,000.
Calculate her 2018 PSPA and PA.
Case D Ms. Dexter has worked for her current employer since 2016. She has been a
member of her employer’s defined benefit RPP during all of this period. In January,
2018, the employer agrees to retroactively increase the benefit formula from 1.6
percent of pensionable earnings for each year of service, to 1.8 percent of pension-
able earnings for each year of service. In the current and both previous years, Ms.
Dexter’s pensionable earnings were $59,000.
Calculate her 2018 PSPA and PA.


(Excess RRSP Contributions)
At the beginning of 2017, Mark Brody had unused RRSP Deduction Room of $25,000. His
account also contains $27,000 in undeducted contributions as he was laid off in early 2017,
shortly after he made the $27,000 contribution.
As his inability to find employment continues, throughout 2017, he withdraws a total of
$15,000 from his RRSP to cover living expenses. He had no Earned Income for RRSP purposes
during 2016 or 2017 and does not make any RRSP deduction for 2017.
In 2018, he finds a job and, based on this, he has Earned Income for RRSP purposes of
$42,000. In addition, he wins $85,000 in the provincial lottery. On March 1, 2018, he
deposits $50,000 of this amount in his RRSP.
Required:
A. Determine Mark's maximum RRSP deduction for 2018.
B. Determine the ITA 204.1 penalty (excess RRSP contributions), if any, that would be
assessed to Mark for the year ending December 31, 2018.


(RRSP Contributions)
During 2017 and 2018, Mr. Donald Barnes has the following income, loss and withholdings
data:
2018 2017
Gross Salary $57,000 $55,000
Taxable Benefits 1,250 1,150
CPP Contributions ( 2,594) ( 2,564)
EI Premiums ( 858) ( 836)
Union Dues ( 175) ( 175)
Profit From Tax Advisory Service 12,220 4,150
Net Loss From Rental Property ( 6,480) ( 11,875)
Spousal Support Received From Former Wife 2,400 2,400
Taxable Dividends (Grossed Up Amount) 2,900 3,210
Interest On Government Bonds 2,110 3,640
At the end of 2017, Mr. Barnes had no Unused RRSP Deduction Room and no undeducted
RRSP contributions.
Required: For 2018, determine Mr. Barnes’ maximum allowable deduction for contribu-
tions to a Registered Retirement Savings Plan under the following assumptions:
A. During 2017 and 2018, Mr. Barnes is not a member of a Registered Pension Plan or a
Deferred Profit Sharing Plan.
B. Mr. Barnes is a member of a Registered Pension Plan. His employer reports that his
Pension Adjustment is $4,200 for 2017 and $4,300 for 2018, all of which reflects contri-
butions made by his employer.


(Employment Income With RRSP)
During the year ending December 31, 2018, Ms. Nancy Harcourt earned a gross salary of
$72,000. Her employer withheld the following amounts from her salary:
Canada Pension Plan Contributions $ 2,594

Income Taxes 18,500
Parking Fees - Company Garage 480
Donations To United Way 800
Union Dues 360
Other Information:
1. Ms. Harcourt is a member of her employer’s money purchase RPP. Her employer made a
contribution on her behalf that was equal to the $4,200 contribution that was withheld
from her salary.
2. Ms. Harcourt was the year’s top salesperson. The award from her employer was an all
expense paid trip to the Bahamas in December, 2018. The cost of this trip was $5,600
and, in addition, Ms. Harcourt was provided with $1,000 in cash for incidental expenses
during the month that she was on the trip.
3. Ms. Harcourt’s employer provides her with a car that cost the company $53,000, plus
$6,890 of HST. The employer purchased the car in 2017. Ms. Harcourt drives the car a
total of 36,000 kilometers during the year, 16,000 kilometers of which were for employ-
ment related purposes. The car was used by Ms. Harcourt for the entire year, with the
exception of the one month that she was in the Bahamas. Her employer required that the
car be left in the company garage during the month that it was not in use.
4. Ms. Harcourt’s employer provides a 20 percent discount to employees on all merchandise

sold by the enterprise. During the year, Ms. Harcourt purchased merchandise with a list
price of $12,000 and received a discount of $2,400.
5. In addition to her employment income, Ms. Harcourt had taxable capital gains from stock
market trading of $6,200, a net rental loss of $3,900, and a self-employed business loss of
$24,600.
6. At the end of 2017, Ms. Harcourt’s Unused RRSP Deduction Room was $4,500 and she
had no undeducted RRSP contributions. Her employer reported that she had a 2017
Pension Adjustment of $7,000. Assume her Earned Income for 2017 is equal to her 2018
Earned Income.
Required:
A. Calculate Ms. Harcourt’s net employment income for the year ending December 31,
2018.
B. Calculate Ms. Harcourt’s maximum deductible RRSP contribution for 2018.


Prior to 2015, Ms. Sherly Sam had no Earned Income for RRSP purposes. In 2015 and 2016,
she had sufficient Earned Income to allow for maximum allowable RRSP deductions in 2016
and 2017. However, she did not make any contributions in either of those years.
Sherly has been employed by a Canadian public corporation since 2016. The following infor-
mation pertains to her income over the past two years:
2018 2017
Salary Before Benefits $150,000 $150,000
Automobile Benefit 7,000 6,500
Employee Stock Option Benefit 4,000 3,000
Benefit On Interest Free Loan 2,000 1,500
Registered Pension Plan Contributions ( 4,500) ( 5,000)
Deductible Employment Expenses ( 3,200) ( 3,400)
Interest Income 2,200 2,100
Taxable Capital Gains 14,500 6,300
Net Business Income (Note 1) 21,300 14,600
Royalty Income (Note 2) 6,400 6,600
Net Rental Loss ( 5,000) ( 10,000)
Spousal Support Payments Received 24,000 24,000
Eligible Dividends 1,400 1,500
Totals $220,100 $197,700
Note 1 The business income is from a mail order business that Sherly runs out of her
home.
Note 2 The royalty income is from a manual that she wrote on how to write instruc-
tion manuals.
Sherly participates in her employer's money purchase Registered Pension Plan. Her employer
contributes twice the amount contributed by each employee to the plan. Her Pension Adjust-
ment for 2017 is $15,000.
Required Ignore all GST considerations.

A. Calculate Sherly’s Earned Income for the purpose of determining her maximum 2018
RRSP contribution by listing the items and amounts that would be included in her Earned
Income. List separately the items that are not included in the Earned Income calculation.
B. Calculate Sherly’s maximum deductible RRSP contribution for 2018.


(Comprehensive Employment Income With RRSP - Plus Death Of
Registrant)
Mr. Frank Sabatini has been a salesman for a large, publicly traded Canadian corporation for
the last 15 years. During the year ending December 31, 2018, he earned a base salary of
$58,000 and commissions of $74,000. In addition, the corporation reimbursed him for
invoiced travel costs of $12,300. Included in these travel costs were $5,600 in expenditures
for meals while travelling and entertainment of clients.
Other Information:
1. The corporation made a number of deductions from Mr. Sabatini’s salary. The amounts
were as follows:
Canada Pension Plan contributions $ 2,594
Employment Insurance premiums 858
Income taxes 39,000
Registered Pension Plan contributions 3,500
Contributions to a registered charity 600
Parking fees - company garage 240
Employee share of life insurance premium (See item #2) 1,500
Employee share of sickness and accident
insurance premium (See item #3) 550
2. Mr. Sabatini is covered by a group life insurance policy that pays $150,000 in the event of
his death. The total annual premium on this policy is $3,000, with one-half of this amount
paid by the employer.
3. Mr. Sabatini is covered by a group sickness and accident insurance plan that he joined on
January 1, 2018. The premium on this plan is $100 per month, one-half of which is paid
by Mr. Sabatini’s employer. The plan provides periodic benefits that compensate for lost
employment income. During 2018, Mr. Sabatini was hospitalized during all of November
and received a benefit from the sickness and accident insurance plan in the amount of
$4,500. Payment of the monthly premium was waived during the one month period of
disability.
4. Mr. Sabatini’s employer provides him with an automobile that was purchased in 2017 for
$68,000. During 2018 Mr. Sabatini drives this automobile 99,000 kilometers, 92,000 of
which are employment related. All operating costs, amounting to $16,200 for 2018, are
paid by the employer. During the period of his hospitalization, his employer required that
the vehicle be returned to the company garage. Mr. Sabatini pays the company $1,000 for
his personal use of the automobile during 2018.
5. As a result of his extensive employment related travel, Mr. Sabatini has accumulated over
300,000 points in a frequent flier program. All of Mr. Sabatini’s travel costs have been
charged to his personal credit card and his employer has reimbursed him for all of these
charges.
On December 30, 2018, he uses 150,000 of these points for two first class tickets to
Cancun. Mr. Sabatini is accompanied on this one week trip by his secretary and, while
there is some discussion of business matters, the trip is primarily for pleasure. At the same
time, Mr. Sabatini uses another 30,000 of the points to provide his wife with an airline
ticket to visit her mother in Leamington, Ontario. The normal cost of the Cancun tickets is
$11,000, while the normal cost of the Leamington ticket is $600.

6. In 2015, Mr. Sabatini received options to purchase 1,000 shares of his employer’s stock at
a price of $12.50 per share. At the time the options were granted, the shares were trading
at $10.00 per share. During December, 2018, Mr. Sabatini exercises these options. At
the time of exercise, the stock is trading at $23.50 per share.
7. Mr. Sabatini’s employer allows him to purchase merchandise at a discount of 30 percent
off the normal retail prices. During 2018, Mr. Sabatini acquires such merchandise at a
cost (after the applicable discount) of $6,790.
8. In addition to reimbursing him for invoiced travel costs, Mr. Sabatini’s employer pays a
$5,000 annual fee for his membership in a local golf and country club. During 2018, Mr.
Sabatini spends $6,800 entertaining clients at this club. None of these costs are reim-
bursed by Mr. Sabatini’s employer.
9. Mr. Sabatini’s employer contributes $2,400 to the company’s Registered Pension Plan on
his behalf and, in addition, contributes $2,000 in his name to the company’s Deferred
Profit Sharing Plan.
10. Mr. Sabatini has correctly calculated that his employment income added $116,000 to his
2017 Earned Income for RRSP purposes. This Earned Income figure has not taken into
consideration the following items:
2018 2017
Business Loss ($ 3,300) ($12,500)
Taxable Dividends (After Gross Up) 600 800
Interest Income 1,100 660
Rental Income 2,000 7,500
Child Support Received
(For 8 Year Old Son) 6,000 6,000
11. Mr. Sabatini’s Unused RRSP Deduction Room carried forward from 2017 was nil and he
had no undeducted RRSP contributions. His employer reports that his Pension Adjust-
ment for 2017 was $6,800.
12. On May 18, 2018, Mr. Sabatini contributes $2,600 to his wife’s RRSP. His only contribu-
tion to his own RRSP in 2018 and 2018 was $10,000 in February, 2018. This contribution
was deducted in full on his 2017 tax return.
13. In July, 2019, Mr. Sabatini drowns in his swimming pool. The police found receipts for the
Cancun trip with his secretary floating beside him in the pool.
Required:
A. Determine Mr. Sabatini’s minimum net employment income for the year ending
December 31, 2018, and indicate the reasons that you have not included items in your
calculations. Ignore GST implications.
B. Calculate Mr. Sabatini’s RRSP Deduction Limit for 2018 and determine his RRSP deduc-
tion in the calculation of his Net Income For Tax Purposes for 2018.
C. Assume that Mr. Sabatini’s RRSP does not specify a beneficiary if he dies. Describe the tax
consequences of his death on his RRSP.
D. Assume Mr. Sabatini’s wife is the sole beneficiary of his RRSP. Describe the tax conse-
quences of his death on his RRSP.


(Retiring Allowance With RRSP)
Mr. Colt, an employee of Jeffco Ltd., has agreed to accept early retirement in 2018, in return
for a retiring allowance of $125,000. Mr. Colt began working for Jeffco Ltd. in 1977. He has
been a member of the Company ’s Registered Pension Plan for only the last 10 years.
At the beginning of 2018, Mr. Colt had Unused RRSP Deduction Room of $32,000. His 2017
Earned Income was $46,000 and his T4 for 2017 included a Pension Adjustment of $8,000.
Mr. Colt plans to contribute $50,000 of the retiring allowance into a Registered Retirement
Savings Plan (RRSP) in his name, and the remaining $75,000 into a newly established spousal
RRSP.
Required:
A. Determine the maximum RRSP contribution that Mr. Colt can deduct in 2018.
B. What are the tax implications for Mr. Colt in 2018 if he makes his planned contributions
($50,000 payment to his RRSP and the remainder to a spousal RRSP)? As Mr. Colt’s finan-
cial consultant, what advice would you give him regarding his RRSP contributions and
deductions?


(Employment Compensation Tax Planning)
Mr. Jones is 62 years old and his wife, Mabel, is 58 years old. Mabel has no income of her own
as she spends most of her waking hours maintaining her supernatural phenomena blog .
In January, 2018, he agreed to undertake a special project for the Martin Manufacturing
Company, a company that produces large industrial use motors. The project is expected to
take three years to complete. Mr. Jones was previously employed by the Martin Manufac-
turing Company for 11 years from 1985 to 1995. However, since then, he has operated his
own consulting organization in Windsor.
Accepting the special project for the Martin Manufacturing Company will require that Mr.
Jones discontinue his consulting operation and move to Hamilton, where the head offices of
the Company are located. This does not concern Mr. Jones as he plans to retire in three years
under any circumstances. It will, however, require that he sell his home in Windsor and
acquire a new residence in Hamilton. Mr. Jones anticipates that he will require a mortgage of
approximately $100,000 in order to purchase a residence.
Mr. Jones and the Company have agreed to a salary of $100,000 per year for the three year
period, with no additional benefits other than the required payments for Employment Insur-
ance and the Canada Pension Plan. However, the Company has indicated that it is prepared to
be flexible with respect to the type of compensation that is given to Mr. Jones, subject to the
condition that the total cost of providing the compensation does not exceed $300,000 over
the three year period.
The Martin Manufacturing Company is a Canadian public company and is subject to a
combined federal and provincial tax rate of 30 percent. It currently has a Registered Pension
Plan for its employees. However, this plan was not in place during the earlier 11 year period in
which Mr. Jones was employed by the Company.
Mr. Jones has other income and is concerned about the fact that his $100,000 per year salary
will attract high levels of taxation. He is seeking your advice with respect to how his compen-
sation arrangement with the Martin Manufacturing Company might be altered to provide
some reduction or deferral of taxes. He indicates that, subsequent to retirement, his income is
likely to be less than $60,000 per year.
Required: Advise Mr. Jones with respect to alternative forms of compensation that could
reduce or defer taxes on the $300,000 that he is to receive from the Martin Manufacturing
Company.


Ms. Kerri Sosteric is 33 years of age. She is divorced from her former husband and has custody
of the two children from that marriage. Her son Barry is 5 years old and her daughter Kim is 8
years old. Neither of her children have any income during 2018.
The terms of Kerri’s 2016 divorce decree require that her former husband pay $1,500 per
month in child support and an additional $500 per month in spousal support. During 2017
and 2018, all amounts were paid in a timely fashion.
Because she works on a full time basis, Kerri sends her children to a commercially operated
day care centre. During 2018, the cost of this care was $8,600. The day care centre provides
receipts for this amount.
During 2018, medical expenses for Kerri and her family are as follows:
Kerri $ 560
Barry 240
Kim 1,820
Total $2,620
Kerri is employed by a large public company. Employment related information for the years
2017 and 2018 is as follows:
2017 2018
Gross Salary $47,000 $53,000
Commissions 6,200 7,800
Canada Pension Plan Contributions 2,564 2,594
Employment Insurance Premiums 836 858
RPP Contributions (Note) 1,800 1,950
Note Kerri’s employer makes a matching contribution to the money purchase RPP in
each of the two years.
Other than the RPP contributions, Kerri’s employer provides no other benefits. In addition,
she is required to maintain an office in her home with no reimbursement provided. Her
employer provides the required T2200 form. Kerri’s home had cost $420,000 on January 1,
2017, with $120,000 of this amount being the estimated value of the land. For 2017 and
2018, the total costs of owning and operating this home are as follows:
2017 2018
Utilities And Maintenance $ 1,850 $ 2,040
Insurance 625 715
Property Taxes 4,200 4,400
Mortgage Interest 12,000 11,800
Kerri’s home office occupies 15 percent of the total floor space in the home.
In January, 2017, Kerri acquires a residential duplex that she uses as a rental property. The
cost of the property is $340,000, with $80,000 of this amount being the estimated value for
the land. For the two years 2017 and 2018 rents and expenses other than CCA are as follows:

2017 2018
Rents $ 8,400 $13,800
Expenses Other Than CCA 10,300 11,100
In January, 2017, Kerri acquired 5,000 shares of her employer’s stock at its fair market value of
$12.00 per share. During 2017, these shares paid eligible dividends of $0.75 per share.
During 2018, she receives eligible dividends of $0.60 per share. During December, 2018,
Kerri sells all of her shares at their fair market value of $14.75 per share.
Kerri has unused RRSP deduction room carried forward from 2017 of $6,200. In addition, her
plan contains $5,800 in undeducted contributions. Based on the undeducted contributions
in the plan, along with any additional contributions required to meet this goal, Kerri would
like to deduct an amount in 2018 that would reduce her unused RRSP deduction room to nil at
Required: Ignore GST/HST/PST considerations.

A. Calculate the additional contribution Ms. Sosteric must make to her RRSP.
B. Assume that Ms. Sosteric contributes the amount calculated in Part A to her RRSP. Calcu-
late Ms. Sosteric’s 2018 minimum:
• Net Income For Tax Purposes,
• Taxable Income, and
• federal Tax Payable before consideration of any income tax that would have been
withheld or paid in instalments.


At the beginning of 2018, Mr. Ahmed Sidi is 71 years old and has been retired for 5 years. Prior
to his retirement, he had been a long-term employee of a large public company. During 2018,
he receives payments from the employer’s RPP of $86,000. Both the employee and employer
contributions to this RPP ended when Mr. Sidi retired.
In addition to the pension income from his employer’s RPP, in 2018, Ahmed is entitled to
$11,000 in Canada Pension Plan benefits. When Ahmed first began to receive CPP benefits,
he elected to split these benefits with his wife, Adrianna.
Because his income is consistently in excess of $150,000 per year, he has not applied for and
does not receive OAS payments.
Ahmed has a 45 year old son who has been blind since birth. The son lives with Ahmed and has
no income of his own.
Ahmed's wife Adrianna has provided all of the care required for their son. She is 66 years old
at the beginning of the year and, during 2018, she received OAS payments of $7,000 in addi-
tion to the $5,500 in CPP benefits that Ahmed has elected to split with her. She has no other
personal source of income. However, for 2018, Ahmed will split all of his qualifying pension
income with Adrianna.
The family ’s medical expenses are as follows:
Ahmed $ 2,500
Adrianna 3,100
Son 9,800
Total $15,400
Ahmed makes an annual donation to the Canadian National Institute For The Blind of $4,000.
While he was still employed, he was granted options to acquire 5,000 shares of his employer’s
stock. The option price was $15 per share and, at the time the options were granted, this was
also the fair market value of his employer’s shares. All of these options were exercised in
February, 2018. At this time, the shares were trading at $21 per share. In November, 2018, all
of the shares are sold for $23 per share.
Ahmed had other investment income during 2018 as follows:
Interest From Canadian Sources $18,000
Eligible Dividends Received 2,200
Foreign Source Interest (Net Of 10 Percent Withholding)* 2,700
Total $22,900
*Assume that the foreign tax credit is equal to the amount withheld.
On January 1, 2018, Ahmed owns three residential rental properties. They are all Class 1
properties. Relevant information on these properties is as follows:
Property A Property B Property C

Capital Cost - Building $560,000 $685,000 $426,000
UCC On January 1 422,000 571,000 $385,000
Rental Revenues 34,000 42,000 26,000
Expenses (Other Than CCA) 29,000 37,000 23,000

On December 31, 2018, property A is sold for $960,000. The value of the land for this prop-
erty was $100,000 at the time of purchase and had increased to $340,000 at the time of sale.
The vendor pays $96,000 in cash, with Ahmed taking back a mortgage for the $864,000
balance. The mortgage requires annual payments of $86,400 on the principal, beginning in
2019.
When he turned 71 in 2017, Ahmed transferred his RRSP assets into a RRIF. On January 1,
2018, the fair market value of these assets is $1,250,000. As he has little need for current
income, Ahmed would like to minimize his withdrawals from the plan.
At the beginning of 2018, Ahmed opens an RRSP with his wife as the registrant. He has no
unused RRSP deduction room carried forward from 2017. He would like to make the
maximum deductible contribution to his wife’s RRSP during 2018. In calculating this amount,
assume that his 2017 earned income is equal to his 2018 earned income.
Required: Ignore GST/HST/PST considerations.

A. Calculate Mr. Sidi’s maximum deductible spousal RRSP contribution for 2018.
B. Assume that Mr. Sidi contributes the amount calculated in Part A to his wife’s RRSP.
Calculate Mr. Sidi’s 2018 minimum:
• federal Tax Payable before consideration of any income tax that would have been
C. In general terms, without doing calculations, describe the factors that Mr. Sidi should
consider when deciding how much pension income he should split with his spouse.

SSS Problem Ten - 1

The solutions to these Chapter 10 SSS Problems can be found following the
SSS Problems for this Chapter.
SSS Problem Ten - 1

(Calculation Of PAs, PSPAs, And PARs)
Each of the following independent Cases involves calculations of the Pension Adjustment
(PA), Past Service Pension Adjustment (PSPA), or Pension Adjustment Reversal (PAR) that
would be reported by the employer.
Case A Barbra Stressand has worked for her current employer since 2015. In
January 2018, this employer implements a defined benefit RPP. The benefits of the
plan are extended to all years of service prior to the inception of the plan. The plan
provides a benefit equal to .75 percent of pensionable earnings for each year of
service. Barbra's pensionable earnings in prior years were as follows:
2015 $46,000
2016 49,000
2017 54,000
2018 55,000
Required: Calculate Barbra's 2018 PSPA and PA.
Case B Jane Fisher's employer sponsors both a defined contribution RPP and a
DPSP. Jane is a member of both plans. During 2018, on Jane's behalf, her employer
contributes $3,300 to the RPP and $1,500 to the DPSP. Jane contributes $2,400 to the
RPP.
Required: Calculate Jane's 2018 PA.
Case C Mark Lanvin begins working for LTC Ltd. at the beginning of 2016. LTC
sponsors a defined benefit RPP with benefits that do not become vested until after an
employee has been with the corporation for five years. LTC has reported the following
PAs for Mark:
2016 $4,500
2017 4,800
On January 1, 2018, Mark is offered a better position with a competing corporation
and resigns at LTC Ltd.
Required: Calculate Mark's PAR for 2018.
Case D Victor Fortune's employer sponsors a defined benefit RPP. During 2018,
Victor and his employer make matching contributions of $2,500 each. The plan
provides a benefit of 1.3 percent of pensionable earnings for each year of service.
Victor has 2018 pensionable earnings of $41,000.
Required: Calculate Victor's 2018 PA.
Case E Martin Davis has worked for his current employer since 2016. He has been a
member of his employer's defined benefit RPP since his employment began. His
pensionable earnings were $62,000 in 2016 and $65,000 in 2017. Because of

SSS Problem Ten - 2
worsening economic conditions in his employer's industry, the employees have

agreed to have the benefit formula reduced from 1.5 percent of pensionable earnings
for each year of service, to 1.3 percent of pensionable earnings for each year of
service. The change will be applied retroactively for all prior years of service.
Required: Calculate Martin's 2018 PSPA.
SSS Problem Ten - 2

(Excess RRSP Contributions)
On December 1, 2017, Mary Jo Bush, on the advice of her hairdresser, deposited her inheri-
tance of $54,000 in her RRSP. She had made no RRSP contributions prior to this. Because she
had very little Taxable Income in 2017, she did not deduct any portion of her RRSP contribu-
tion in that year.
She has provided you with the following information:
• Her Unused RRSP Deduction Room is $10,000 at the end of 2017.
• She made an additional RRSP contribution of $5,000 on February 1, 2018.
• Mary Jo withdraws $35,000 from the RRSP on December 1, 2018.
• For 2018, the annual increase in Mary Jo’s RRSP Deduction Limit is $9,000 (18 percent of
her 2017 Earned Income of $50,000).
Required: Determine the ITA 204.1 penalty (excess RRSP contributions), if any, that would
be assessed to Mary Jo for the year ending December 31, 2018.

SSS Problem Ten - 3
SSS Problem Ten - 3

Carla Goodman has been employed by Army Brake Products (ABP), a Canadian controlled
private corporation, since 2016. The following information pertains to her income over the
past two years:
2018 2017
Salary Before Benefits $120,000 $120,000
Employee Stock Option Benefit 8,000 5,000
Benefit On Interest Free Loan 6,000 5,000
Registered Pension Plan Contributions ( 4,000) ( 3,000)
Deductible Employment Expenses ( 4,500) ( 4,000)
Interest Income 1,800 1,600
Business Income 34,000 35,000
Royalty Income 7,000 5,000
Rental Loss ( 5,000) ( 10,000)
Spousal Support Payments ( 15,000) ( 12,000)
Non-Eligible Dividends On ABP Stock 900 1,000
Totals $164,200 $153,600
The royalty income listed above is 2 percent of the sales of the “Handy Shopper,” a gadget Ms.
Goodman invented three years ago. The business income listed above is earned from selling
leather goods.
Ms. Goodman had no Earned Income for RRSP purposes prior to 2015. While in 2015 and
2016, she had sufficient Earned Income to enable her to deduct the maximum allowable RRSP
contribution for 2016 and 2017, she made no RRSP contributions in either of these years.
Beginning in 2017, Ms. Goodman participates in ABP’s employee money purchase Registered
Pension Plan. ABP contributes twice the amount contributed by an employee to the plan. Her
Pension Adjustment for 2017 is $9,000.
Required Ignore all GST considerations.

A. Calculate Ms. Goodman’s Earned Income for the purpose of determining her maximum
2018 RRSP contribution by listing the items and amounts that would be included in her
Earned Income. List separately the items that are not included in the Earned Income
calculation.
B. Calculate Ms. Goodman’s maximum deductible RRSP contribution for 2018.

SSS Problem Ten - 4
SSS Problem Ten - 4

(Net Income With RRSP)
During 2017 Ms. Alexis Akerfeldt had the following amounts of income and deductions under
the various subdivisions of Division B of the Income Tax Act:
Eligible Dividends Received 8,000
Taxable Capital Gains 10,300
Allowable Capital Losses ( 12,300)
Subdivision E Deductions (Moving Expenses) ( 3,000)
At the end of 2017, Ms. Akerfeldt’s Unused RRSP Deduction Room was $6,000. There were
no undeducted contributions in her RRSP account.
Required:
A. Calculate Ms. Akerfeldt’s 2017 Net Income For Tax Purposes and any carry overs avail-
able to her.
B. Calculate the maximum deductible contribution Ms. Akerfeldt can make to her RRSP for
the 2018 taxation year for the following independent Cases:
Case 1 During 2017, she is a member of a money purchase Registered Pension Plan
(RPP) in which she has contributed $2,000 and her employer has contributed $2,500.
Case 2 During 2017, she is a member of a Deferred Profit Sharing Plan (DPSP) in
which her employer contributed $3,500 per employee.
Case 3 During 2017, she is not a member of a RPP or DPSP. Assume that in addition
to the preceding information, she also has net business income of $165,000. She has
contributed $1,500 to her husband’s RRSP in August, 2018.

SSS Problem Ten - 5
SSS Problem Ten - 5

Mrs. Rhonda Sorenson is 44 years old and lives in Waterloo, Ontario. She is married to Martin
Sorenson and they have one child. Martin is currently unemployed and his only 2018 income
is $8,400 in Employment Insurance Benefits.
Their 19 year old daughter Cissy is in full time attendance at the University Of Waterloo for 8
months during 2018. Ms. Sorenson pays Cissy ’s 2018 tuition of $7,800 and, because Cissy ’s
2018 income is only $6,500, she agrees to transfer to her mother the maximum tuition credit.
Other Information:
1. Mrs. Sorenson is employed by a large publicly traded company, earning a gross salary of
$67,000 in 2018. In addition, she received commissions of $3,150. During 2018, her
employer withheld the following amounts from her salary.
Canada Pension Plan Contributions $2,594
Donations To United Way 600
Professional Dues 350
Contribution To Disability Insurance Plan 1,000
Rhonda’s employer makes a matching contribution of $2,750 to her RPP, as well as a
matching contribution of $1,000 to her disability insurance plan. The plan provides peri-
odic benefits that compensate for lost employment income. Mrs. Sorenson began
contributing to the disability insurance plan in 2017. Her contribution in that year was
$900.
2. Mrs. Sorenson’s employer provides her with a car that was purchased in 2017 for
$45,200. The car was used by Mrs. Sorenson throughout the year, except for a period of
one month during which she was hospitalized for a nervous disorder. During this one
month period, she was required to return the car to the company garage.
During 2018, the car was driven a total of 62,000 kilometers, of which 51,000 were
employment related. Her employer paid all of the operating costs which totaled $9,300
for 2018.
3. Her employer reimburses 100 percent of her airline tickets and meals, but only a portion
of her lodging costs. As a result, she has unreimbursed employment related travel costs.
For 2018, these totalled $4,200.
She is required to maintain an office in her home without reimbursement from her
employer. Her employer provides the required T2200 form. Based on the portion of her
house that is used for this office, the related costs are as follows:
Utilities And Maintenance $ 850
Insurance 725
Mortgage Interest 960
4. During her one month hospitalization, Mrs. Sorenson received disability insurance bene-
fits of $4,800.
5. During 2018 Mrs. Sorenson earned interest on term deposits of $3,200. In addition, she
received eligible dividends of $1,500.

SSS Problem Ten - 5
6. On May 1, 2018, Mrs. Sorenson sold a piece of land for $143,000, receiving a down
payment of $43,000 in cash. The remaining balance will be paid in 5 annual instalments
in the years 2019 through 2023. The adjusted cost base of the land was $87,000.
7. The family medical expenses were as follows:
Rhonda $ 1,200
Martin 2,750
Cissy 8,395
Total $12,345
8. In 2017, Mrs. Sorenson’s had Net Income For Tax Purposes of $57,525. This was made up
of net employment income of $55,000 (after the deduction of $2,400 of RPP contribu-
tions), a net business loss of $8,600, interest income of $2,000, grossed up dividends of
$3,525, and royalties on a song she wrote eight years ago of $5,600.
9. At the end of 2017, Mrs. Sorenson’s Unused RRSP Deduction Room was $7,400 and she
had no undeducted RRSP contributions. Her employer reported that she had a 2017
Pension Adjustment of $5,200.
Required: Ignore GST considerations.

A. Calculate Mrs. Sorenson’s maximum deductible RRSP contribution for 2018.
B. Assume that Mrs. Sorenson contributes the amount calculated in Part A to her RRSP.
Calculate Mrs. Sorenson’s 2018 minimum:
• Federal Tax Payable before consideration of any income tax that would have been

SSS Solution Ten - 1

Case A
The required PSPA would be calculated as follows:
2015 Amount [(.75%)(9)($46,000)] $ 3,105.00
2016 Amount [(.75%)(9)($49,000)] 3,307.50
2017 Amount [(.75%)(9)($54,000)] 3,645.00
2018 PSPA $10,057.50
In addition to the PSPA calculated above, there would be a 2018 PA of $3,713

[(.75%)(9)($55,000)].
Case B
The required 2018 PA would be calculated as follows:
Employer’s Contribution To RPP $3,300
Employer’s Contribution To DPSP 1,500
Jane’s Contribution To RPP 2,400
PA $7,200
Case C
The required PAR would be calculated as follows:
2016 PA $4,500
2017 PA 4,800
2018 PAR $9,300
Case D
The required 2018 PA would be calculated as follows:
[(1.3%)(9)($41,000)] = $4,797
Note that the contributions made during 2018 have no influence on the PA for a defined
benefit RPP.
Case E
The required PSPA would be calculated as follows:
2016 Amount [(1.5% - 1.3%)(9)($62,000)] $1,116
2017 Amount [(1.5% - 1.3%)(9)($65,000)] 1,170
2018 PSPA (Reduction In Benefits) $2,286
Note that, in this case, the PSPA involves a reduction in benefits. This means that it would be
added rather than deducted in the calculation of the RRSP Deduction Limit.
There would also be a 2018 PA. However, this cannot be calculated as the problem does not
provide the 2018 pensionable earnings.


The excess RRSP contributions amount at the end of each month of 2018 would be calculated
as follows:
March To
January February November December
Undeducted Contributions
At Beginning Of Month $54,000 $54,000 $59,000 $59,000
Add: 2018 Contribution 5,000
Deduct: 2018 Withdrawal ( 35,000)
Undeducted Contributions
At End Of Month $54,000 $59,000 $59,000 $24,000
Deduct: Unused Deduction
Room Carried Forward ( 10,000) ( 10,000) ( 10,000) ( 10,000)
Deduct: 2018 Increase In
Unused Deduction Room ( 9,000) ( 9,000) ( 9,000) ( 9,000)
Deduct: $2,000 Cushion ( 2,000) ( 2,000) ( 2,000) ( 2,000)
Monthly Cumulative Excess $33,000 $38,000 $38,000 $ 3,000
Penalty At 1 Percent Per Month $ 330 $ 380 $ 380 $ 30
The total penalty for 2018 is $4,160 [($330)(1) + ($380)(10) + ($30)(1)].

If the $35,000 excess contributions are withdrawn from the RRSP prior to the end of the year
following the year in which an assessment is received for the year in which the contribution is
made, an offsetting deduction is available.


Part A
For purposes of determining her maximum 2018 RRSP contribution, 2017 Earned Income
Net Employment Income *

Salary $120,000
Employee Stock Option Benefit 5,000
Benefit On Interest Free Loan 5,000
Deductible Employment Expenses ( 4,000) $126,000
Business Income 35,000
Royalty Income (Own Invention) 5,000
Spousal Support Payments ( 12,000)
Earned Income $144,000
*
Note that, in calculating Earned Income for RRSP purposes, no deduction is made
from net employment income for contributions made to an RPP.
A listing of the items that are not included in the calculation of Earned Income is as follows:
• Registered Pension Plan Contributions
• Interest Income
• Taxable Capital Gains
• Non-Eligible Dividends
Part B
The calculation of Ms. Goodman’s maximum deductible RRSP contribution for 2018 is as
follows:
2016 RRSP Dollar Limit $25,370

2017 RRSP Dollar Limit 26,010
Opening Unused RRSP Deduction Room $51,380
Annual Addition - Lesser Of:
• 2018 RRSP Dollar Limit = $26,230
• 18 Percent Of 2017 Earned Income
[(18%)($144,000)] = $25,920 25,920
2017 PA ( 9,000)
Maximum Deductible RRSP Contribution For 2018 $68,300


Ms. Akerfeldt’s Net Income For Tax Purposes would be calculated as follows:
Income From Property
[($8,000)(138%)] 11,040 $82,040
Allowable Capital Losses (Maximum) ( 12,300) Nil
Deductions Under ITA 3(d):
Ms. Akerfeldt’s Net Income For Tax Purposes is $61,040 and she has a net capital loss carry
over of $2,000 ($12,300 - $10,300).
Part B - Case 1
Ms. Akerfeldt’s 2017 Earned Income would be calculated as follows:
Add Back RPP Contributions 2,000
Given this, her maximum deductible RRSP contribution would be calculated as follows:
Unused Deduction Room - End Of 2017 $ 6,000
• 18% of 2017 Earned Income Of $55,000 = $9,900 9,900
Less 2017 PA ($2,000 + $2,500) ( 4,500)
Maximum Deductible RRSP Contribution $11,400
Part B - Case 2


Less 2017 PA ( 3,500)
Part B - Case 3
Net Employment Income $ 71,000
Business Income 165,000
Less 2017 PA Nil
2018 RRSP Deduction Limit $32,230
Less 2018 Contribution to Spousal RRSP ( 1,500)


Part A - RRSP Contribution
In order to determine Mrs. Sorenson’s maximum RRSP deduction for 2018, we need to calcu-
late her Earned Income for 2017. The calculation is as follows:
Net Business Loss ( 8,600)
Royalties 5,600
2017 Earned Income $54,400
Given the preceding calculation, her maximum deductible RRSP contribution for 2018 is as
follows:
• 18% Of 2017 Earned Income Of $54,400 = $9,792 9,792
Less 2017 PA ( 5,200)
Part B
Net Employment Income
Mrs. Sorenson’s net employment income for the year would be calculated as follows:
Gross Salary $67,000
Commission Income 3,150
Registered Pension Plan Contributions ( 2,750)
Professional Dues ( 350)
Taxable Car Benefit (Note One) 8,825
Employment Expenses (Note Two) ( 5,050)
Disability Insurance Benefits (Note Three) 2,900
Note One The taxable benefit on the car would be calculated as follows:
Standby Charge [(2%)(11)($45,200)][11,000 ÷ 18,337] $5,965
• [(11,000)($0.26)] = $2,860
• [(1/2)($5,965)] = $2,983 2,860
Total Benefit $8,825
As Mrs. Sorenson’s employment related driving is more than 50 percent of the total,
she is eligible for the reduced standby charge calculation. This also means that she is
eligible to use the alternative operating cost benefit calculation based on one-half the
standby charge. In this case, this approach does not produce the lower operating cost
benefit and is not used.

Note Two Mrs. Sorenson can deduct home office costs of $850 in utilities and main-
tenance under ITA 8(1)(i) which is available to all employees. However, under 8(1)(f),
she could also deduct insurance and property taxes. The non-reimbursed travel costs
can be deducted under either provision. As discussed in Chapter 3, she cannot use
both ITA 8(1)(f) and ITA 8(1)(h).
The amounts available under the two provisions are as follows:
Home Office Costs - Utilities And Maintenance 850
Home Office Costs - Insurance 725
Home Office Costs - Property Taxes 1,340
Non-Reimbursed Travel Costs 4,200
Available Under ITA 8(1)(f) $7,115
Non-Reimbursed Travel Costs 4,200

Home Office Costs - Utilities And Maintenance 850
Available Under ITA 8(1)(f) and (i) $5,050
Unfortunately, the deduction under ITA 8(1)(f) is limited to her commission income of
$3,150. Given this, she is better off deducting the $5,050 that is available under ITA
8(1)(f) and (i).
Note Three As her employer contributes to the disability insurance plan, the
$4,800 in benefits received must be included in income. However, this can be
reduced by the cumulative contributions that she has made to this plan. These total
$1,900 ($1,000 + $900), leaving a net income inclusion of $2,900 ($4,800 - $1,900).
Property Income
Mrs. Sorenson’s property income would be calculated as follows:
Interest Income $3,200
Eligible Dividends 1,500
Gross Up [(38%)($1,500)] 570
Total Property Income $5,270
Taxable Capital Gains

Mrs. Sorenson’s sale of land resulted in a capital gain of $56,000 ($143,000 - $87,000).
However, as the total proceeds were not collected in the year of sale, she can reduce her
income inclusion through the use of a reserve.
Total Capital Gain $56,000
Reserve - Lesser Of:
• [($56,000)($100,000 ÷ $143,000)] = $39,161
• [($56,000)(20%)(4 - 0)] = $44,800 ( 39,161)
Remaining Gain $16,839
Inclusion Rate 1/2


Mrs. Sorenson’s Net Income For Tax Purposes would be calculated as follows:
Employment Income (See Preceding Calculations) $73,725
Property Income 5,270
Taxable Capital Gain 8,420
RRSP Deduction (Part A) ( 11,992)
Taxable Income
As Mrs. Sorenson has no deductions applicable to the determination of Taxable Income, her
Taxable Income is equal to her Net Income For Tax Purposes.
Tax Payable
Tax On First $46,605 $ 6,991
Tax Credits:
Spousal ($11,809 - $8,400) ( 3,409)
Employment Insurance ( 858)
Canada Pension Plan ( 2,594)
Transfer Of Cissy’s Tuition - Lesser Of:
• Absolute Limit Of $5,000
• Actual Tuition Of $7,800 ( 5,000)
Medical Expenses (Note Four) ( 9,887)
Rate 15% ( 5,213)
Charitable Donations (Note Five)
[(15%)($200) + (29%)($600 - $200)] ( 146)
Dividend Tax Credit On Eligible Dividends [(6/11)($570)] ( 311)
Note Four The credit base for medical expenses would be calculated as follows:
Rhonda And Martin’s Expenses ($1,200 + $2,750) $3,950
Lesser Of:
• [(3%)($75,423)] = $2,263
Subtotal $1,687
Cissy’s Medical Expenses $8,395
• $2,302
• [(3%)($6,500)] = $195 ( 195) 8,200
Base For Credit $9,887
Note Five As none of her income is taxed at 33 percent, this rate will not be appli-
cable to the calculation of the charitable donations tax credit.

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Self Study And SSS Problems For Chapters 1 to 10 Volume 1 Page 1

Self Study And SSS Problems For Chapters 1 to 10

Canadian Tax Principles - Self Study And SSS Problems (2018/2019)

Chapter 1 Self Study Problems

SOLUTION available in printed and online Study Guide.

Self Study Problem One - 2

Required: Discuss Mr. Right’s proposed flat rate tax system.

SOLUTION available in printed and online Study Guide.

Canadian Tax Principles - Self Study And SSS Problems (2018/2019)

Self Study Problem One - 3

SOLUTION available in printed and online Study Guide.

Canadian Tax Principles - Self Study And SSS Problems (2018/2019)

Self Study Problem One - 4

SOLUTION available in printed and online Study Guide.

Self Study Problem One - 5

SOLUTION available in printed and online Study Guide.

Self Study Problem One - 6

SOLUTION available in printed and online Study Guide.

Canadian Tax Principles - Self Study And SSS Problems (2018/2019)

Self Study Problem One - 7

SOLUTION available in printed and online Study Guide.

Self Study Problem One - 8

SOLUTION available in printed and online Study Guide.

Canadian Tax Principles - Self Study And SSS Problems (2018/2019)

Self Study Problem One - 9

SOLUTION available in printed and online Study Guide.

Canadian Tax Principles - Self Study And SSS Problems (2018/2019)

Self Study Problem One - 10

SOLUTION available in printed and online Study Guide.

Self Study Problem One - 11

SOLUTION available in printed and online Study Guide.

Canadian Tax Principles - Self Study And SSS Problems (2018/2019)

Self Study Problem One - 12

SOLUTION available in printed and online Study Guide.

Canadian Tax Principles - Self Study And SSS Problems (2018/2019)

Chapter 1 Supplementary Self Study (SSS) Problems

SSS Problem One - 1

Canadian Tax Principles - Self Study And SSS Problems (2018/2019)

SSS Problem One - 2

B. Ms. Gloria Salinas is a Canadian citizen who, on November 1, 2018, is appointed as

Canadian Tax Principles - Self Study And SSS Problems (2018/2019)

SSS Problem One - 13

Canadian Tax Principles - Self Study And SSS Problems (2018/2019)

SSS Problem One - 4

Case A Christophe has employment income of $46,700, interest income of $3,500,

Case B Christophe had employment income of $75,400, interest income of

SSS Problem One - 5

Canadian Tax Principles - Self Study And SSS Problems (2018/2019)

Chapter 1 Supplementary Self Study (SSS) Solutions

B. A possible advantage would be economic development in that the deductibility of interest

Canadian Tax Principles - Self Study And SSS Problems (2018/2019)

SSS Solution One - 2

Canadian Tax Principles - Self Study And SSS Problems (2018/2019)

SSS Solution One - 3

Canadian Tax Principles - Self Study And SSS Problems (2018/2019)

SSS Solution One - 4

Canadian Tax Principles - Self Study And SSS Problems (2018/2019)

SSS Solution One - 5