[SOLVED] canadian income tax midterm exam – Business Finance

canadian income tax midterm exam 6:30pm-8:20 oct 14 i have some review materials for this exam.Copyright © 2021 Pearson Education Ltd.
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Chapter 1
INTRODUCTION TO FEDERAL
TAXATION IN CANADA
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Alternative Tax Bases
• Federal Revenues
– Personal Income (50.3%)
– Corporate Income (13.7%)
– GST (12.0%)
– Other Sources (9.1%)
– Employment Insurance Premiums (6.5%)
– Other Excise Taxes (3.6%)
– Non-Resident Income Tax (2.9%)
– Custom and Import Duties (1.9%)
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Taxable Entities – Income Tax
• Individuals
• Corporations
• Trusts
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Economic Objectives
• Resource Allocation
• Distribution Effects
• Stabilization Effects
• Fiscal Federalism
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Other Tax Systems
• Property Tax
• Consumption Tax
• Value Added Tax
• Tariffs and Duties
• User Tax
• Capital Tax
• Head Tax
• Wealth Tax
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Taxation And Income Levels
• Progressive Systems
• Regressive Systems
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Taxation And Income Levels
• Evaluation
– Progressive Is Viewed As Fair (Ability To Pay)
– Flat Rate (Arguments For)
• Less Complex
• Doesn’t Kill Initiative
• Doesn’t Encourage Evasion
• Fairer If Income Fluctuates
• Fairer To One Income Families
• Less Pressure For Concessions
• Rates May Be Too High – Can Reduce Revenues
– Downside Is That Flat Rates Are Regressive
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Tax Incidence
Tax Incidence (Corporate Tax)
Who pays?
Shareholders?
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Customers?
Qualitative Characteristics
• Equity of Fairness
• Certainty
• Neutrality
• Balance between
sectors
• Adequacy
• Elasticity
• Flexibility
• Simplicity – Ease of
compliance
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• International
competitiveness
Evaluation Of Canada
• Equity – High income individuals and corporation paying little tax.
• Balance Between Sectors – Heavy reliance on personal income
tax.
• Complexity – Canada system is very complex and becomes more
so every year.
• Dependability Of Revenues – Too much reliance on the resource
sector.
• International Competitiveness
– Corporations – Was very good. Trump changes in the U.S.
has made Canada less competitive
– Individuals – Top rates at 50+ percent. Not competitive with
U.S.
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Income Tax Act
• Parts I Through XIX
– Within Some Parts
• Divisions
– Within Some Divisions
• Subdivisions
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Income Tax Act
• Within Parts, Divisions, Or Subdivisions
– Sections
– Subsections
– Paragraphs
– Subparagraphs
– Clauses
– Sub-Clauses
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ITA 84 (1) (a) (i) (I) (A)
Part I
• Division A – Liability For Tax (Chapter 1)
• Division B – Net Income For Tax Purposes
– Subdivision a – Employment (Chapter 3)
– Subdivision b – Business And Property (Chapters 5, 6, and 7)
– Subdivision c – Taxable Capital Gains/Allowable Capital Losses
(Chapter 8)
– Subdivision d – Other Sources (Chapter 9)
– Subdivision e – Other Deductions (Chapter 9)
• Division C – Taxable Income (Chapters 4 and 11)
• Division E – Tax Payable (Chapters 4 and 11)
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Other Income Tax Legislation
• Draft Legislation
• Income Tax Regulations
• International Tax Treaties
• Income Tax Application Rules
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Other Sources Of Information
• Electronic library resources
• CRA web site
• CRA Publications
– Interpretation Bulletins (Being Phased Out)
– Income Tax Folios (Replacing Interpretation Bulletins)
– Information Circulars
– Income tax technical news, news releases, and fact sheets
– Guides and pamphlets
– Advance rulings and technical interpretations
• Court Decisions
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Basic Charging Provision
ITA 2(1)
Tax payable by persons resident in Canada
An income tax shall be paid, as required by this Act, on the taxable
income for each taxation year of every person resident in Canada at
any time in the year.
Note that in the U.S., individuals are taxed on citizenship, without
regard to residence. In Canada, individuals are taxed on residence,
without regard to citizenship.
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Basic Charging Provision
• Meaning Of Taxable Income
– Net Income
– Less Specified Deductions (e.g., loss carry overs)
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Basic Charging Provision
• Taxation Year
– Individuals – Calendar Year
– Corporations – Fiscal Period
– Trusts
• Inter Vivos − Calendar Year
• Testamentary (In General) − Calendar Year
• Graduated Rate Estates (A type of testamentary) – Fiscal Period
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Basic Charging Provision
• Meaning Of Person
– Individual
– Corporation
– Trust
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Residence of Individuals
•
The average Canadian individual whose job, family, dwelling
place, and other personal property are all in Canada, would clearly
be a Canadian resident and, as a result, he would be liable for
Canadian taxation on his worldwide income.
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S5-F1-C1 Residence Criteria
• Significant Residential Ties (Primary Ties)
– Dwelling
– Spouse or common-law partner
– Dependants
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S5-F1-C1 Residence Criteria
• Other Residential Ties (Secondary Ties)
– Personal Property
– Social Ties
– Economic Ties
– Landed Immigrant status or work permit
– Health Card, Driver’s License
– Vehicle Registration
– Passport
– Membership In Canadian Unions Or Professional Associations
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Exercise 1-6 (22)
Would Simon still be considered a resident of Canada?
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Temporary Absences
• Has residence status been retained
– Intent
– Frequency of visits
– Residential ties outside of Canada
Exercise 1-7 (23)
Would Jane be considered a Canadian resident during her
absence?
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Part Year Residence
•
Entering Canada
– Usual immigration rules
– Other factors may be considered
•
Departing Canada:
– Latest Of:
• Departure Date
• Departure Of Spouse And Dependants
• Establishment Of New Residence
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Part Year Residence
Exercise 1-8 (24)
How will Mark be taxed in the current year?
Exercise 1-9 (24)
How will Jonathan be taxed in the current year?
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Deemed Residents – ITA 250(1)
1. Sojourners in Canada for 183 days or more.
2. Members, at any time during the year, of the Canadian armed
forces when stationed outside of Canada.
3. Ambassadors, ministers, high commissioners, officers or servants
of Canada, as well as agents general, officers, or servants of a
province, provided they were Canadian residents immediately prior
to their appointment.
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Deemed Residents
4. An individual performing services, at any time in the year, in a
country other than Canada under a prescribed international
development assistance program of the Government of Canada,
provided they were resident in Canada at any time in the 3 month
period preceding the day on which those services commenced.
5. A child of a deemed resident, provided they are also a dependant
whose net income for the year was less than the base for the basic
personal tax credit ($13,229 for 2020).
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Deemed Residents
6. An individual who was at any time in the year, under an agreement
or a convention with one or more other countries, entitled to an
exemption from an income tax otherwise payable in any of those
countries, because at that time the person was related to, or a
member of, the family of an individual who was resident in Canada.
Exercise 1-10 (26)
Determine the residency status of Suzanne.
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Individuals With Dual Residency
• Tax treaties have tie-breaker rules
• U.S./Canada treaty – factors considered
– Permanent home
– Centre of vital interests
– Habitual abode
– Citizenship
• If factors don’t resolve – competent authority procedures
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Residence of Corporations
• Incorporated In Canada After April 26, 1965
– Deemed Resident
• Incorporated In Canada Before April 27, 1965
– Deemed Resident If:
• Was Resident At Any Time
• Carried On Business In Canada
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Residence of Corporations
•
Incorporated outside of Canada
– Location of mind and management in the current year
•
Dual residency of corporations
– US/Canada treaty considers a corporation to resident of the
corporation in which it was incorporated
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Exercise 1-12 (28)
Determine the residency status of Roswell
Exercise 1-13 (28)
Determine the residency status of Sateen
Exercise 1-14 (29)
Case 1
Case 2
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ITA 2(3) Charging Provision For Non-Residents
•
Types Of Income
–
Employment In Canada
–
Carried On Business In Canada
–
Disposition Of Taxable Canadian Property
•
Return required if Part I tax payable
•
Taxable Income – most deductions are available
•
Tax Payable – most credits are not available
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ITA 2(3) Charging Provision For Non-Residents
•
Employment Income
–
Income earned by a non-resident while working in Canada
–
U.S. Citizen, resident in Detroit, working at an auto plant in
Windsor, Ontario
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ITA 2(3) Charging Provision For Non-Residents
•
Business Income
–
Canadian taxes on persons who carry on business in Canada
–
See Chapter 20 for discussion of the meaning of “carrying on a
business in Canada”
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ITA 2(3) Charging Provision For Non-Residents
•
Dispositions Of Taxable Canadian Property By Non-Residents
–
–
Taxable Canadian Property
•
Real Estate
•
Some capital property and inventories of a business carried on in
Canada
•
Some listed and unlisted shares
See Chapter 20 for a more complete discussion
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Property Income Of Non-Residents
–
In general, taxed under Part XIII of the Income Tax Act
–
Typically 25% but many tax treaties reduce it to 15%
–
We won’t be covering Part XIII in this course
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Concept Of Income
• Economist’s View
• CRA View
– Not Very Specific
– Employment Income
– Based On Wealth Or
Assets
– Business Income
• Accountant’s View
– Recognize Revenue
– Match Expenses
– GAAP Based
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– Property Income
– Net Taxable Capital
Gains
– Other Inclusions And
Deductions
Net Income For Tax Purposes:
Components
• Four Ordinary Sources of Income (Employment, Business,
Property and Capital Gains)
• Net Employment Income
– Division B, subdivision a
– Inclusions less deductions
– Only individuals
– Rarely negative
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Net Income For Tax Purposes:
Components
• Business Income
– Division B, subdivision b
– Inclusions less deductions
– Individuals, corporations, and trusts
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Net Income For Tax Purposes:
Components
• Property income
– Division B, subdivision b
– Inclusions less deductions
– Individuals, corporations, and trusts
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Net Income For Tax Purposes:
Components
• Capital Gains and Losses (100%)
– Division B, subdivision c
– Taxable Capital Gains (50%)
– Allowable Capital Losses (50%)
– Losses only deductible against gains
– Individuals, corporations, and trusts
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Net Income For Tax Purposes:
Components
• Items That Don’t Fit Basic Categories
– Other sources of income
• Division B, subdivision d
(e.g., pension income or spousal support received)
– Other deductions from income
• Division B, subdivision e
(e.g., RRSP contributions or spousal support paid)
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Net Income For Tax Purposes
Calculation Rules – ITA Section 3
ITA 3(a) Positive
Sources Of Income
Other than Capital Gains
ITA 3(b) Excess Of Taxable
Capital Gains
Over Allowable Capital Losses
ITA 3(c) Subtract Subdivision (e) Deductions
From The Sum Of ITA 3(a) And 3(b)
ITA 3(d) Subtract Non-Capital Losses
Net Income For Tax Purposes
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ITA 3(a)
• Includes positive amounts of:
– Employment income
– Business income
– Property income
– Other positive inclusions
• Does NOT include employment, business, or property losses.
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ITA 3(b)
• Includes
– Excess, if any*, of Taxable Capital Gains over Allowable Capital
Losses
– If losses greater than gains in current year, this amount is nil
– Stated alternatively, allowable losses can only be deducted to
the extent of taxable gains.
*The phrase “if any” is used in tax work to indicated that negative
balances are ignored.
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ITA 3(c)
• ITA 3(c) is equal to:
– the sum of ITA 3(a) plus ITA 3(b)
– less Division B, Subdivision e deductions
• Moving expenses
• Child care costs
• RRSP contributions
• Spousal support paid
• ITA 3(c) will be positive or nil – It cannot be negative
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ITA 3(d)
• ITA 3(d) is equal to:
– The amount, “if any”, by which ITA 3(c) exceeds
– All current year losses including Allowable Capital Losses
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Loss Carry Overs
Carry back 3 years
to claim refund
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Non-Deductible
Current Year
Losses
Carry forward
various periods to
reduce future taxes
Net Income Example
Data for Marianne Nobel
Employment Income
$58,000
Business Loss
( 23,000)
Taxable Capital Gains
20,000
Allowable Capital Losses
( 12,000)
Subdivision e Deductions
( 3,000)
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Example Solution
Net Income For Tax Purposes
ITA 3(a) – Employment Income
ITA 3(b) – TCG Less ACL
Subtotal
Subdivision e Deductions
ITA 3(c)
ITA 3(d) – Business Loss
Net Income For Tax Purposes
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$58,000
8,000
$66,000
( 3,000)
$63,000
( 23,000)
$40,000
Exercise 1-15 (36)
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Exercise 1-16 (36)
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Exercise 1-17 (36)
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Extra Problems
• AP 1-7 (44)
• AP 1-8 (45)
• AP 1-12 (47)
• AP 1-13 (47)
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HOMEWORK AND QUIZ
AS POSTED TO MOODLE
DUE SEPTEMBER 20TH
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Chapter 3
EMPLOYMENT INCOME
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Employment Income
• General Concept
– Salary and wages
– Tips and gratuities
– Director’s fees
– Signing bonuses
– Other bonuses
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Cash Vs. Accrual
ITA 5(1) – Income from office or employment — Subject to this Part, a
taxpayer’s income for a taxation year from an office or employment is
the salary, wages, and other remuneration, including gratuities,
received by the taxpayer in the year.
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Bonus Arrangements
Figure 3-1 Bonus Arrangements
Type Of Bonus Arrangement
Tax Consequences
Standard Bonus
The employer deducts when declared.
(Paid within 180 days of business year end.)
The employee includes when received.
Other Bonus (Paid more than 180 days after the
employer’s year end, but prior to three years after
the end of the year in which the bonus was
earned.)
The employer deducts when paid.
Salary Deferral Arrangement
The employer deducts when earned.
(Paid more than three years after the end of the
year in which it was earned.)
The employee includes when earned.
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The employee includes when received.
Bonus Arrangements
Exercise 3-1 (83)
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Employee vs. Self-Employed
Employee Perspective
• Availability Of Deductions
• Withholding vs. Instalments
• CPP and EI
• Fringe Benefits
• Opportunity For Tax Evasion
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Employee vs. Self-Employed
Employer Perspective
• No CPP, Payroll Taxes, Or EI
• No Benefits Paid
• Pay GST/HST
• Less Of A Commitment Than To An Employee
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Employee vs. Self-Employed
Determination
• Basic Factor Is Intent
• Other Considerations
– Control
– Ownership Of Tools
– Ability To Subcontract /Hire Assistants
– Financial Risk
– Responsibility For Investment And Management
– Opportunity For Profit
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Case #1 – Bettina Harmon
Bettina Harmon, a well-know Vancouver artist, signed a contract with the University of Calgary
to beautify the campus. Bettina spent all of 2020 completing the beautifications. During that
time, she enhanced the campus with her own artwork and pieces bought at local art auctions.
The University restricted Bettina’s choice of art to Canadian artists. As well, the University
controlled the colour schemes and types of art selected (painting, sculptures or murals) for the
various locations on campus. However, within these requirements, Bettina was permitted to
exercise artistic discretion over the actual pieces chosen. This gave her a great degree of latitude
over the campus beautification.
Bettina could produce the art herself, purchase another artist’s work and focus on any theme she
desired. Bettina worked at her own studio and used her own tools for her own productions. If the
University did not like the art she produced or bought, she was not reimbursed for those costs
and had to resell the art on the open market. Over the year, Bettina channeled all of her energy
into the University’s beautification and did not produce any art for any outside clients.
Bettina has asked you to help her determine if she is an independent contractor or an employee.
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Employee Benefits
• Basic Concepts
– Benefit arises when employer gives or pays something to:
• An employee
• A person related to the employee
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Inclusions
• Salaries And Wages
– The basic form of compensation
• Non-Salary Benefits (a.k.a., Fringe Benefits)
– Used for tax avoidance and deferral
– Used for employee motivation
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Legislative Guidance
• ITA 6(1)(a) requires any benefit received by employee to be
included in income.
–
–
–
–
–
–
–
–
–
Allowances for personal expenses
Director’s fees
Allocations under profit sharing plans or employee trusts
Wage loss replacement plans
Employee benefit plans
Employee trusts
Salary deferral arrangements
Reimbursements and rewards
Automobile standby and operating cost benefits.
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Legislative Guidance
• ITA 6(1)(a) Exceptions (Excluded From Income)
– RPP Contributions By Employer
– Premiums On Group Disability Insurance
(If benefits are taxable)
– Private Health Care
– Deferred Profit Sharing Plans
– Supplementary Unemployment Benefits
– Counselling – Re: Mental Or Physical Health
– Financial Counselling – Re: Re-Employment Or Retirement
– Benefits Under Retirement Compensation Arrangements
– Benefits Resulting From Reduced Tuition To Children Of Teachers At
Private Schools
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Legislative Guidance
• Other ITA 6 Inclusions
–
–
–
–
–
–
–
–
–
Reasonable standby charge
Payments to employee by employer
Group term life insurance
GST/HST on benefits
Interest on employee debt
Salary deferral arrangements
Forgiveness of debt
Disability related benefits
Eligible housing loss
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Items Covered In Employers’ Guide
• Automobile benefits
• Board and lodging
• Cell phone and internet benefits
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Items Covered In Employers’ Guide
• Employer provided child care
• Discounts on employer merchandise
• Education related benefits
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Items Covered In Employers’ Guide
• Gifts
• Awards
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Items Covered In Employers’ Guide
(Continued)
• Insurance
• Employee Loans (covered in Tax II)
• Loyalty and other points programs
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Items Covered In Employers’ Guide
(Continued)
• Meals
• Medical Expenses
• Moving Expenses
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Items Covered In Employers’ Guide
(Continued)
• Parking
• Pooled registered pension plans
• Provincial health care premiums
• Private health care premiums
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Items Covered In Employers’ Guide
(Continued)
• Professional membership dues
• Recreational facilities and club dues
• Stock options (covered in Tax II)
• Employer sponsored social events
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Items Covered In Employers’ Guide
(Continued)
• Spousal travel expenses
• Tax-free savings accounts
• Tickets to events
• Tool reimbursement
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Items Covered In Employers’ Guide
(Continued)
• Transit passes
• Travel allowances
• Uniforms or special clothing
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Tax Planning Considerations
• Salary Is Benchmark
– Deduct When Accrued
– Taxed When Paid
• Tax Reasons For Using Alternatives
– Avoidance Of Tax (e.g., employer provided dental plan)
– Deferral Of Tax (e.g., RPP contributions)
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Exercise 3-2 (94)
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Exercise 3-3 (94)
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Example:
Susan works for LMX Ltd. which paid the following amounts on behalf of Susan:
1. Registered pension plan contributions (defined benefit)
$1,100
2. Provincial medical plan premiums (not a health service levy)
500
3. Extended health care premiums – Sun Life (private)
200
4. Drug plan premiums – Mutual of Omaha
100
5. Tuition fee for a calligraphy course offered by a local resident
95
6. Non-cash Christmas gift which the company did expense for tax
purposes
375
7. Subsidized lunches at company cafeteria:
Fair market value
700
Actual cost
500
Amount paid by Susan
300
8. Membership fees in a private golf club
1,000
9. Financial counseling
750
Indicate if the above amounts are taxable under paragraph 6(1)(a) and IT-470R.
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GST/HST/PST On Taxable Benefits
ITA 6(7) Benefits Determined With GST/HST/PST Included
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Employment Income And Automobiles
• Benefits from employer provided vehicles
– Standby charge
– Operating cost benefit
• Allowances for using employee owned vehicle
• Deductions for using employee owned vehicle
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Employer Supplied Automobiles
• Current Rules – IT-63R5
– Fixed Costs – Standby Charge
– Variable Costs – Operating Cost Benefit
– Amounts Reduced By Employee Payments
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Standby Charge – ITA 6(2)
• Less Than 50% Employment Usage
– Employer Owns Car
• [(2%)(Cost Of Car)(Months Of Availability)]
• Availability = Available Days/30 and rounded to whole number
– Employer Leases Car
• [(2/3) (Lease Payments For The Year Excluding Insurance)
(Availability Factor)]
• Availability = T4130 allows rounding
– GST/HST/PST Included
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Standby Charge Reduction
• Primarily (50% Or More) Employment Usage
• Multiply Regular Charge By:
Non-employment Kilometers ÷
1,667 Kilometers for Month of Availability
• Numerator Cannot Exceed 1,667 Km. Per Month
– This Means The Fraction Cannot Exceed 1
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Operating Costs – ITA 6(1)(k)
• Less Than 50% Employment Usage
– $0.28 Per Kilometre Of Non-Employment Usage For 2020
• Primarily Employment Usage
– Can Substitute One-Half Of Standby Charge
(If employment usage more than 50 percent)
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Tax Planning For
Employer Provided Automobiles
• Must Be Required To Return The Keys And Vehicle
• Keep Records
• Leasing Vs. Buying
• Minimize Standby Charge
• Avoid Luxury Cars
• Pay Employees To Use Own Cars
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Exercise 3-6 (103)
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Exercise 3-7 (104)
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Allowances
• Defined – An amount paid to an employee to cover some type of
cost
• Reimbursements (Based on actual costs)
– Not in employee’s income
– Employee cannot deduct any of the actual costs
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Allowances
• Taxable
Allowances
– Included in employee’s
income
– Employee can deduct
actual costs
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• Non-Taxable
Allowances
– Must be reasonable
– Not in employee’s
income
– Employee cannot
deduct actual costs
Allowances
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Allowances
• Employer’s Perspective
– Paying taxable allowances is easiest
– No need for keeping individual employee mileage records
• Employee’s Perspective
– Receiving non-taxable allowances is easiest
– No need to keep expense records
– May or may not be beneficial depending on the relationship
between the allowance and actual costs
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Exercise 3-8 (107)
Exercise 3-9(107)
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Exercise 3-10 (108)
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Insurance Benefits
• Life Insurance
– A benefit
• Health Care
– Private – Not a benefit
– Provincial
• Individual Premiums – a benefit
• Payroll Tax – not a benefit
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Disability Insurance
• Premiums Paid By Employer
– ITA 6(1)(a): Not A Taxable Benefit
(Benefits received are taxable)
• Premiums Paid By Employee
– Not Deductible When Paid
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Disability Insurance
• Benefits Received
– Employer Makes Contributions – Taxable
• Can be offset by deducting cumulative employee contributions
– Employer Does Not Make Contributions – Not Taxable
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Exercise 3-11 (110)
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Other Inclusions
• Payments by employer to employee
• Forgiveness of employee loans
• Housing loss reimbursement (if a moving expense – see Chapter 9)
• Discounts on employer merchandise are tax free.
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Deductions – ITA 8(1)(f)
Salesperson’s Expenses
• Conditions
– Required To Pay Expenses
– Required To Work Away From Office
– Paid At Least In Part By Commissions
– If An Allowance Received, Included In Income
– Have Signed Form T2200
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Types Of Expenses – ITA 8(1)(f)
• Accounting And Legal
Fees
• Bonding, Insurance,
And Medical Fees
• Advertising
• Equipment (if leased)
• Entertainment, Meals,
And Lodging
• Salaries, Rents
(including home office)
• Parking
• Transportation And
Motor Vehicle Costs
• Supplies
• Licences
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Limitations – ITA 8(1)(f)
• Can’t exceed commission income
• Can’t use ITA 8(1)(h) or 8(1)(h.1) for excess over commission
income
• The basic trade-off
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ITA 8(1)(h) – Travel
ITA 8(1)(h.1) – Motor Vehicle
• Conditions
– Required To Pay Expenses
– Required To Work Away From Office
– If An Allowance, Included In Income
– Signed Form T2200
– No ITA 8(1)(f)
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Exercise 3-16 (125)
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ITA 8(1)(i) – Other Expenses
• Examples
– Legal expenses to collect income or establish income rights
– Union or professional dues
– Office rent
– Salary to an assistant
– Cost of supplies
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CCA And Interest Costs
• Can only be deducted on
– Automobiles
– Aircraft
– Musical instruments (CCA only)
• Not available on other assets (e.g., computers or cell phones)
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Work Space In Home
• Space is principal place of business, or
• Space is used exclusively to produce income and it is used on a
regular and continuous basis for meeting clients or customers
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Work Space In Home
• Commission Salesperson
– Operating and maintenance
– Property taxes
– Insurance
• Other Employees
– Operating and maintenance
• No CCA
• No mortgage interest
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Assignment Problem 3-11 (ignore #8)
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Example: Employment Benefits – Joe Smith
Joe Smith has asked for your assistance concerning the tax implications of certain amounts and
benefits he received from his employer during 2020.
Salary, gross
$100,000
Payroll deductions:
Income taxes
$40,000
Canada Pension Plan premiums
2,898
Employment Insurance premiums
856
Group accident disability insurance
premiums
150
(43,904)
Net pay
$ 56,096
Additional information:
1. In October 2020, Joe was in an ice fishing accident and was unable to work for four
weeks. During this period he received disability payment totaling $1,700. Half of the
disability insurance premiums were paid by his employer and half by Joe (see payroll
deductions above). Joe has paid a total of $500 in disability insurance premiums since he
commenced employment.
2. In 2020, Joe’s employer paid $315 (including GST of $15) for the preparation of Joe’s
2019 income tax return and $735 (including GST of $35) for Joe to see a financial
planning consultant regarding retirement planning.
3. Joe is taking courses towards his MBA degree on a part-time basis during the evening.
He is taking the courses on his initiative and for his own benefit. During 2020, his
employer paid for the tuition for these MBA courses which amounted to $2,000. His
employer also paid $900 in tuition for Joe to attend a two-day computer workshop on
company time to learn about the new software system that the company had just installed.
4. Director’s fees of $2,500 were received by Joe from a company owned by Joe’s brother.
5. Christmas gift of $300 cash was received and was expensed by his employer.
7. For 12 months, his employer paid Joe a monthly gas allowance of $300 regardless of the
number of kilometers he drove. In addition, he was provided with a company-owned
automobile costing $40,000 (including GST and PST) at the beginning of January. Joe’s
kilometers for personal use were 17,000 out of a total of 27,000 kilometers. Operating
costs paid (excluding gas) by his employer during 2020 was $3,200 including insurance
of $1,000, PST of $300 and GST of $170.
8. Joe was provided with his employer’s condo in Hawaii for a two-week holiday during the
winter. Excluding GST considerations, such accommodation during this peak period
would have cost him $1,500 as opposed to the $500 actually paid by Joe.
9. Joe used his frequent-flyer points accumulated as a result of his business trips (which had
been paid by his employer) for his holiday in Hawaii. He saved $800, plus $40 of GST,
by using the frequent-flyer points.
10. Joe bought merchandise from his employer during the year and saved $200 (excluding
GST) using its 35% employee discount, which is available to all employees.
Calculate Joe’s employment income inclusions for 2020.
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Extra Problems
• Self Study 3-1
• Self Study 3-4
• Self Study 3-10 (ignore note 4)
• Self Study 3-11 (ignore note 5 and other info 2)
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HOMEWORK AND QUIZ
AS POSTED TO MOODLE
DUE SEPTEMBER 27TH
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Chapter 4
TAXABLE INCOME AND TAX
PAYABLE FOR INDIVIDUALS
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1
From Net To Taxable Income
Employment
Income
Business And
Property
Income
Net Taxable
Capital Gains
Division C
Deductions
Taxable
Income
Other Sources
Of Income
Other
Deductions
From Income
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2
Deduction For Payments
• Tax treaty exemptions
• Worker’s compensation – Removes from net income
• Income from employment with prescribed international
organizations
• Social assistance payments – Removes from net income
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3
Tax Payable – The Basic System
• 2019 Rates
Taxable Income
Marginal Rate
In Excess Of
Federal Tax
On Excess
$ -0-
$ -0-
15.0%
48,535
7,280
20.5%
97,069
17,230
26.0%
150,473
31,115
29.0%
214,368
49,645
33.0%
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4
The Basic System
Example For 2020, an individual has Taxable Income of $100,000
and only his basic personal tax credit of $1,984 [(15%)($13,229)].
Tax On First $97,069
$17,230
Tax On Next $2,931 ($100,000 – $97,069) At 26%
Total Federal Tax Before Credit
Basic Personal Credit
Federal Tax Payable
762
$17,992
( 1,984)
$16,008
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5
Provincial Tax Payable
• All Provinces Apply Progressive Rates To Taxable Income
– 2020 Minimum = (5.06% In BC to 10.8% In Manitoba
– 2020 Maximum = (14.5% In Saskatchewan to 21.0% in Nova
Scotia
– Quebec is excluded from these ranges
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6
Tax Credit System
• Refundable Vs. Non-Refundable.
• In general, minimum rate applied to a base (15% for 2020).
• Some credits have income threshold.
• Provinces have similar credits.
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7
2020 Personal Tax Credits
• Basic Personal Amount (BPA)
$13,229 – [($931][(lesser of the individuals net income and
$214,368 – $150,473) ÷ $63,895]
• If Net Income is greater that $214,368, BPA is $12,298 ($13,229 $931)
• If Net Income is less than $150,473, BPA is $13,229
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8
2020 Personal Tax Credits
• Individuals
– ITA 118(1)(c): If Single = [(15%)(BPA)]
– ITA 118(1)(a): If married = [(15%)(BPA)]
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9
2020 Personal Tax Credits
• Spouse Or Common-Law Partner
ITA 118(1)(a) – In addition To The Individual
– If healthy
• (15%)(BPA – Net Income Of Spouse)
– If mentally or physically impaired
• (15%)(BPA + $2,273 – Net Income Of Spouse)
Exercise 2 (147)
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10
2020 Personal Tax Credits
• Amount for Eligible Dependant
ITA 118(1)(b) – In addition to single person
– If healthy
• (15%)(BPA – Net Income Of Eligible Dependant)
– If mentally or physically impaired
• (15%)(BPA + $2,273 – Net Income Of Eligible Dependant)
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11
Amount For Eligible Dependant
• Conditions: you are single, divorced, separated, or widowed and
you supported a dependant:
– who is under 18 (unless parent, grandparent, or infirm)
– living with the individual
– related by blood, marriage, or adoption
– resident of Canada (except child)
– dependent on individual for support
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12
2020 Personal Tax Credits
• Canada Caregiver For Child – ITA 118(1)(b.1)
– Under 18 at end of year
– Mentally or physically impaired
– [(15%)($2,273)] = $341
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13
Canada Caregiver – ITA 118(1)(d)
• Conditions
– Care for a dependant over 17 (does not have to be in-home)
– Resident of Canada (unless child or grandchild)
– Mental or physical infirmity
– Not available if eligible dependant available
– Not available for a spouse or common-law partner
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14
Canada Caregiver – ITA 118(1)(d)
• Value
– Reduced by the dependant’s income in excess of $17,085
– Maximum = [(15%)($7,276)] = $1,091
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15
Canada Caregiver
Additional Amount – ITA 118(1)(e)
• Additional amount for spouse or eligible dependant
– If base for spousal or eligible dependant credits is less than the
Canada caregiver amount base;
– Then, additional amount is available:
Actual spousal or eligible dependant amount, less
Income adjusted Canada caregiver amount
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16
Canada Caregiver
Additional Amount – ITA 118(1)(e) Example
• Infirm spouse with income of $18,163
• Regular spousal credit equal nil
• Additional amount = $6,198 [$7,276 – ($18,163 – $17,085)]
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17
Exercise 3 (151)
Exercise 4 (151)
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18
Exercise 5 (152)
Exercise 6 (152)
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19
Age – ITA 118(2)
• Reach 65 In The Year
• $1,146 = [(15%)($7,637)]
• Reduction
– 15% Of Income > $38,508
– Gone when income reaches $89,421
Exercise 7 (153)
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20
Pension Income – ITA 118(3)
• Amount = 15% Of 1st $2,000 = $300
• Not Indexed
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21
Pension Income – ITA 118(3)
• Qualifying Amounts
– Age 65 Or Older At End Of Year
• Most Non-Government
– < Age 65 At End Of Year • Life Annuities • Amounts Resulting From Death Of Spouse – No CPP, OAS, Or Provincial (QPP) Copyright © 2021 Pearson Education Ltd. 22 Canada Employment – ITA 118(10) • 15 percent of the lesser of $1,245 or employment income. • Maximum = $187 Copyright © 2021 Pearson Education Ltd. 23 Adoption Expenses – ITA 118.01 • Up to $2,484 [(15%)($16,563)] Copyright © 2021 Pearson Education Ltd. 24 Adoption Expenses – ITA 118.01 • Eligible Child – Has not attained age 18 – Issued adoption order • Eligible Expenses – Fees to agency – Court and legal fees – Reasonable travel costs – Mandatory fees related to immigration – Other reasonable expenses incurred after the adoption file is opened Copyright © 2021 Pearson Education Ltd. 25 Exercise 8 (155) Copyright © 2021 Pearson Education Ltd. 26 Digital News Subscription Credit – ITA 118.02 • Maximum = $500 – For digital subscriptions with a qualifying Canadian journalism organization. • Eligible Expenses – Maximum credit - $75 Copyright © 2021 Pearson Education Ltd. 27 Home Accessibility – ITA 118.041 • Qualifying individuals – An individual over 65 – An individual eligible for the disability tax credit • Eligible dwelling: Housing unit located in Canada • Qualifying costs: Allows qualifying individual to be more mobile or more functional within an eligible dwelling • 15% of the lesser of $10,000 and the amount of qualifying costs • Some costs will also be added to the medical expense credit base (double counting). Copyright © 2021 Pearson Education Ltd. 28 Exercise 9 (156) Copyright © 2021 Pearson Education Ltd. 29 First Time Home Buyer’s Tax Credit • $750 [(15%)($5,000)] • Can be claimed by individual or spouse • No home purchase in preceding 4 years Copyright © 2021 Pearson Education Ltd. 30 Volunteer Firefighter’s – ITA 118.06 • $450 [(15%)($3,000)] – Requires 200 hours of volunteer firefighting Copyright © 2021 Pearson Education Ltd. 31 Volunteer Search And Rescue Workers ITA 118.07 • $450 [(15%)($3,000)] – Requires 200 hours of volunteer search and rescue work Copyright © 2021 Pearson Education Ltd. 32 Charitable Donations – ITA 118.1 Calculation [(15%)(A)] + [(33%)(B)] + [(29%)(C)] where: A = The first $200 of eligible gifts. B = The lesser of: – Total gifts, less $200; and – Taxable Income, less $214,368 (for 2020) C = The excess, if any, by which the individual's total gifts exceed the sum of $200 plus the amount determined in B. . Copyright © 2021 Pearson Education Ltd. 33 Charitable Donations – ITA 118.1 • Example: An individual with net income and taxable income equal to $300,000, makes eligible gifts of $210,000. 15% of $200 $ 30 33% Of The Lesser Of: $210,000 - $200 = $209,800 $300,000 - $210,371 = $89,629 29,578 29% Of $210,000 – ($200 + $89,629) = $120,171 34,850 (Remember to add the $30 on the first line.) Copyright © 2021 Pearson Education Ltd. $64,458 34 Charitable Donations – ITA 118.1 • General Rules – Limit: 75% Of Net Income (100% in individual’s year of death and preceding year), plus – 25% of taxable capital gains on gifts of capital property (See Chapter 11), plus – 25% of recapture on gifts of capital property (See Chapter 11) Copyright © 2021 Pearson Education Ltd. 35 Charitable Donations – ITA 118.1 • General Rules – Carry Forward: 5 Years – Subject to the same limitations Copyright © 2021 Pearson Education Ltd. 36 Exercise 10 (159) Exercise 11 (160) Copyright © 2021 Pearson Education Ltd. 37 Medical Expenses – ITA 118.2 • General Rules – 15% of eligible costs – Reduced by the lesser of • 3% of Net Income • $2,397 – The 2020 Figure – Any 12 month period ending in the year Copyright © 2021 Pearson Education Ltd. 38 Medical Expenses – ITA 118.2 • Spouse And Minor Dependants – No Additional Reduction • Dependants Over 17 Years Of Age – Calculated For Each Dependant – Each Dependant’s Medical Expenses, Reduced By The Lesser Of: • $2,397 • 3% Of Dependant’s Net Income Copyright © 2021 Pearson Education Ltd. 39 Medical Expenses – ITA 118.2 Example: An individual with income > $100,000 and medical expenses of
$5,000. His 20-year-old child has medical expenses of $10,000 and net
income of $9,000.
Taxpayer’s Expenses
$ 5,000
Threshold (Maximum)
(
Subtotal
$ 2,603
2,397)
Dependant Expenses – $10,000 Reduced By Lesser Of:
•
(3%)($9,000) = $270
•
$2,397
9,730
Allowable Amount Of Medical Expenses
$12,333
Credit [(15%)($12,333)]
$ 1,850
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40
Exercise 12 (163)
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41
Disability Amount – ITA 118.3
• Must Be Severe And Prolonged
– Significantly Restricts Basic Living Activities
– A Continuous Period Of At Least 12 Months
• Requires Form T2201
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42
Disability Amount – ITA 118.3
• 15% Of $8,576 = $1,286
• No Income Test
• No Claim If:
– More Than $10,000 For Full Time Attendant Care Or
– Costs Of Nursing Home Are Claimed
• Can Be Transferred To Individual Making Claim Under ITA 118(b),
(c.1) Or (d)
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43
Disability Supplement
• If under 18 at end of year:
– 15% Of $5,003 = $750
– Combined provides $2,037 [(15%)($8,576 + $5,003)]
– The $5,003 is reduced by deducted costs in excess of $2,930 for
• Child care costs deducted;
• Amounts deducted under the disability supports deduction; or
• Attendant care amounts claimed for the medical expense tax credit
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44
Exercise 13 (164)
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45
Tuition Credit – ITA 118.5
• Tuition
– 15% Of Actual
– Post-Secondary
– Cost > $100
– No Upper Limit
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46
Tuition Credit – ITA 118.5
• Tuition
– Includes all ancillary, including examination fees, if mandatory
– Includes $250 of ancillary fees and $250 of examination fees
even if not mandatory
– Unlimited carry forward by student
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47
Interest on Student Loans
• Interest On Student Loans
– 15% Of Amounts Paid
– Loans Under The Canada Student Loans Act, the Canada
Student Financial Assistance Act, Or A Provincial Statute
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48
Exercise 14 (166)
Exercise 15 (168)
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49
EI – ITA 118.7
• Maximum For 2020
– EI = [(15%)($856)] = $128
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50
CPP – ITA 118.7
• Employees
– Maximum Payment For 2020 = $2,898
– Maximum Base For Credit = $2,732
– Maximum Credit = [(15%)($2,732)] = $410
– Difference of $166 ($2,898 – $2,732) is a deduction.
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51
CPP – ITA 118.7
• Self Employed
– Maximum Payment For 2020 = $5,796 [(2)($2,898)]
– Maximum Base For Credit = $2,732
– Maximum Credit = [(15%)($2,732)] = $410
– Difference of $3,064 ($5,796 – $2,732) is a deduction.
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52
CPP And EI – ITA 118.7
• Payments In Excess Of Maximums
• Eligible For Refund In Tax Return
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53
Transfer Of Credits
• Spouse – ITA 118.8
– Eligible
• Age
• Pension
• Disability
• Current year tuition
– After Personal, CPP, EI, credits under 118.01 through 118.07,
And Tuition Credit Used
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54
Transfer Of Credits
• Tuition To A Parent Or Grandparent
– N/A If Student’s Spouse Claims Spousal Credit
– Unused Amount After Personal, CPP, EI, And Disability
– To Parent Or Grandparent
– Max = 15%($5,000)
= $750
– Carry Forward By Student Only If Unused
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55
Exercise 16 (169)
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56
Political Contributions
• 3/4 First $400
• 1/2 Next $350
• 1/3 Next $525
• Max = $650 For $1,275
• Not Allowed For Corporations
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57
Political Contributions
• Canada Elections Act
– Individuals limited to $1,625 (2020) for
• registered party
• candidate or leadership contestant
• nomination contestant
Limit increases by $25 on January 1 of each year.
– Corporations
• Totally banned
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58
Exercise 17 (170)
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59
Labour Sponsored Funds (LSVCCs)
• First registered holder
• Federal credit for provincially registered funds
– 15% of cost
– The provincial credit must be at least 15% of cost
– 60% of the fund’s investments must be in small and medium
sized enterprises
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60
Support For Canada’s Media Sector
• 15 percent non-refundable credit for subscribers to digital news
media
• A donations tax credit for contributions to a new category of
“qualified donee” for non-profit journalism organizations. This will
allow these organizations to issue tax receipts for donations from
both individuals and corporations.
• A refundable tax credit for qualifying news organizations that
produce a wide variety of news and information of interest to
Canadians. Specifically, the credit will apply to the labour costs
associated with producing original content.
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61
Refundable Tax Credits
• Most credits can only be used against Tax Payable
• Refundable tax credits are paid to the taxpayer, without regard to
whether there is a Tax Payable balance.
• Discussed Here
– GST/HST
– Medical Expense Supplement
– Canada Workers Benefit (Limited Discussion)
– Teacher And Early Child Educator’s Supplies
– Climate Action Incentive (Some Provinces)
– Canada Training Credit
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62
Refundable GST Credit
• $296 Individual
• $296 Qualified Relation
• $296 Eligible Dependant
• $155 Qualified Dependant
• Total Of Above Less: 5% Of Family Income > $38,507
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63
Refundable Medical Expense Supplement
• Eligibility
– Must be 18 or over at end of year
– Must have earned income (employment or business) of at least
$3,714
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64
Refundable Medical Expense Supplement
• The credit is the lesser of:
– $1,272
– 25/15 of the medical expense tax credit claimed
• Reduced by:
– 5% of family net income in excess of $28,164
– Not available when family net income reaches $53,604
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65
Refundable Medical Expense Supplement
• John Lux and his spouse have medical expenses of $4,500. He
has Net Income of $29,000 while her Net Income is nil. As a result,
the family net income is $29,000.
• His medical expense tax credit would be:
$545 [15%][$4,500 – (3%)($29,000)]
• His supplement would be the lesser of:
– $1,272
– $908 [(25/15)($545)
• Reduced by $42 [(5%)($29,000 – $28,164)]
• The refundable credit would be $866 ($908 – $42)
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66
Canada Workers Benefit
(Formerly Working Income Tax Benefit)
• The problem:
At minimum wage, an individual may be better off not working
– Reductions in social assistance
– Loss of subsidized housing
– Other low income benefits
• Calculations Very Complex (Not Covered In Text)
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67
Refundable Teacher School Supply
• 15 percent of the cost of eligible supplies up to $1,000
• Eligible Educator
– A teacher will need a teacher’s certificate
– Early childhood educator needs either a teacher’s certificate or a
diploma in early childhood education
• Eligible Supplies
•
Durable goods (games, puzzles, educational support software)
•
Consumable goods (construction paper, items for science projects, art
supplies)
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68
Refundable Climate Action Incentive Payments
• Available in provinces that rejected the federal carbon tax
– Manitoba
– New Brunswick
– Ontario
– Saskatchewan
• The refundable credit
– Varies by province ($128 to $305 for a single individual)
– Varies by family size (Ontario = $224 for a single individual to
$448 for a family with two children under 18)
– Not income dependent
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69
Refundable Canada Training Credit
• Qualified individual
– Resident of Canada 25 to 64 years of age
– Earned income in excess of $10,000 in year
– Net income does not exceed 3rd tax bracket ($150,473 for 2020)
• An account accumulates, beginning in 2020, at the rate of $250 per
year.
• Refund equals the lesser of:
– One-half of training costs during the year
– Account balance for preceding year (first year of availability is
2020)
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70
Clawback of EI
• Applicable if EI recipient’s net income exceeds $67,750
• 30 percent of the lesser of:
– EI benefits received
– Excess of net income over $67,750 for 2020
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71
Clawback of OAS
• Lesser Of
– Payments Received
– 15% Of Income In Excess Of $79,054
– OAS Not Paid If Income Is High In Previous Two Years
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72
Assignment Problem 4-1 (182) If Time
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73
Assignment Problem 4-2 (183) If Time
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74
HOMEWORK AND QUIZ
AS POSTED TO MOODLE
DUE OCTOBER 12TH
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BuAd 208 Fall 2020
Review questions for Mid Term 1
A
B
Employment Income
80,000
42,000
Rental income (loss)
12,000
(8,000)
(10,000)
(67,000)
Capital gains
18,000
34,000
Capital losses
12,000
45,000
6,000
12,000
Business income (loss)
Subdivision e deductions
For each of the above cases calculate Andre Dawson’s Net Income for Tax Purposes using
the section 3 format in chapter 1. Also indicate the amount and how they can be used of any
resulting loss carryovers.
Q. 1
1
Q. 2 Robert (Bob) Gibson is a commission salesperson for Industrial Horticulture (IH), a leading
manufacturer of fertilizers and pesticides. During 2020 he earned a base salary of $95,000.
Because of recent changes in the agricultural industry Bob only earned commissions of $12,000.
The following amounts were withheld from Bob’s pay by his employer:
Federal and Provincial Taxes
Registered Pension Plan Contributions (Note 1)
Payments for Group Disability (Note 2)
Payments for Group Life Insurance (Note 3)
$
24,000
5,000
400
250
Note 1: IH has a company pension plan with the company and the employee making equal
payments to the plan.
Note 2: Bob is covered by a comprehensive disability plan which provides income during
periods of disability. The premiums for the disability plan are paid entirely by the employees of
the company. During the year Bob was forced to take eight weeks off due to an unfortunate auto
accident. He received $3,400 in disability payments during this period. Bob has paid in a total
of $1,600 since starting with IH.
Note 3: Bob is covered by the company’s group life policy that will pay his family $250,000 in
the event of his death. Premiums for the plan are paid by the company at double the amount paid
by the employee.
Other Information:
1. For Christmas, IH gave all of the employees of the company memberships in the Cheese
of the Month Club. The membership has a fair market value of $200.
2. As his job requires a significant amount of driving, IH provided Bob with a car. From
January 1st to April 30th Bob used the company Lexus LS 460, which had been purchased
the previous year for $83,000. He drove the Lexus a total of 36,000 km, of which 16,000
could be considered employment usage. On May 1st Bob was in a serious car accident
and totaled the Lexus. When he returned to work, on July 1st, he was provided with a
brand new Prius that the company was leasing for $380 a month, payments include $65 a
month for insurance. From July to December Bob drove the Prius a total of 32,000 km of
which 30,000 could be considered employment usage. All operating costs are paid for by
the company.
3. During the year Bob incurred the following expenses related to his job as a commission
salesperson, none of which were reimbursed by the company:
a. Travel costs of $14,000, of which $2,500 was for meals while of the road.
b. Client entertainment, consisting of tickets to sporting events, of $6,000
c. Other promotional expenses of $2,000
4. During the year IH paid $1,200 for Bob to see a financial planner to discuss financial
issues related to his retirement.
Compute Bob’s minimum net employment income for the year.
2
Q. 3
Lou Brock is a commissioned salesperson and has asked for your help in preparing his 2020 income tax return. He
has provided you with the following information:
Salary
35,000
Commissions for employment
194,000
Interest on treasury bills
1,500
Dividends from Canadian corporations
3,750
Home office expenses (20% of square footage
of home)
Mortgage interest
8,800
Maintenance
1,500
Utilities
2,200
Property taxes
2,000
Insurance
1,700
16,200
Auto expense
Operating costs
6,400
Maintenance
900
CCA (100%)
5,355
Interest on car loan
2,200
14,855
Travel expenses
Hotels
7,200
Airfare
4,500
Car Rental
1,250
Meals
3,000
15,950
Other expenses
Meals with clients , not while travelling
4,800
Gifts for clients (promotional expense)
1,800
Bribes for government officials
10,000
16,600
Lou purchased his car two years ago for $60,000. During the year he drove the car 47,310 km, of which 18,924
were personal use. Lou is required by his employer to maintain an office in his home and he received no
reimbursements or allowances for any of his expenses.
Compute Lou’s minimum net employment income for the year.
3
Q. 4
David Ortiz, the Vice-President of Sky Box Incorporated, has asked for your assistance concerning the tax
implications of the following amounts:
Salary, gross
Payroll deductions
Income taxes
Canada pension plan
Employment insurance
United Way donation
RPP contributions
$140,000
$42,000
2,895
856
1,000
6,000
Net Pay
52,499
$87,501
Additional information:
1. David receives a gas allowance from of $300 a month from his employer, as he is required to his provide
own vehicle and travel for employment. SkyBox has provided David with form T2200. David’s actual auto
costs for the year were $3,150 for gas and $1,200 for other operating costs. David purchased a new BMW
last year for $64,000 on which the maximum CCA claim would be $4,500. He also spent $200 on
employment related parking. David drove a total of 40,000 kilometres, of which 24,000 were
employment related.
2. For Christmas Sky Box gave David a $400 gift certificate to Pottery Barn. David also received a signed Tim
Tebow helmet worth $2,000 to celebrate 10 years as the Sky Box VP.
3. David used the frequent flyer miles that he earned flying for work for a flight to Mexico with his wife. The
flight would have otherwise cost him $800 plus HST of $104.
4. David is taking two programs from the local community college. The first is Leadership for Executives, at
a cost of $1,800. The second is Flower Arranging for Beginners at a cost of $900. The full $2,700 was paid
by Sky Box.
5. Concerned about his weight, Sky Box paid $720 for a gym membership for David.
6. David paid the following expenses out of his own pocket, and was not reimbursed:
• Meals with customers
$1,700
• CPA dues
1,400
• Hotel and travel costs related to employment
2,200
Compute David’s minimum employment income for the year.
4
Q. 5 In each of the following independent cases, determine the maximum amount of 2020 personal tax
credits .Note that employment income over $50,000 will produce the maximum in CPP and EI paid by the
employee.
a. Louis Boudreau is a divorced 52 year old computer programmer who lives with his 75 year old mother.
Louis earned $60,000 from his employment as well as $5,000 from investments. His mother earns a total
of $22,000 a year from her pension and Old Age Security. Louis also gave $1,000 to the local
representative of the federal NDP Party.
b.
Robin Roberts has net income for tax purposes of $75,000, all of which is from renting out various
properties. He lives with his wife Helen and their three kids Sunshine, Moonbeam and Bob, aged 14, 13
and 10 respectively. Helen does not work outside the home and earns no income of her own. Sunshine
and Moonbeam have no income of their own while Bob earned $16,000. Last year Sunshine was blinded
in an accident and as such qualifies as disabled.
c.
Herbert Pennock has net income for tax purposes of $60,000, entirely from employment. He lives with his
wife Penny who has NITP of $36,000 from her job at a local grocery store. They have two children, Brian,
age 19, and Susan, age 15. Currently Brian is studying Fine Arts at the local community college. Brian
attended full time for 8 months of the year and his father paid tuition of $8,000. Brian had net income
for the year of $8,000 while Susan had none.
d.
Joseph Tinker, 69 years old, is a retired high school teacher who lives with his wife Sandy, age 66. Joseph
earned $45,000 this year, $30,000 from his pension, $10,000 from CPP and $5,000 from Old Age Security.
Sandy’s only income was $6,000 from Old Age Security and $3,000 in pension income. As he is still
extremely physically fit, Joseph volunteered over 300 hours with the local Fire Department during the
year. Joseph also donated $1,000 to the Firefighters Rescue Fund, a registered charity. .
e.
John Evers is a widowed engineer who lives with his four children, Junior 22, Isaac 19, Karen 16 and Jacob
10, John has net income for tax purposes of $130,000 entirely from his employment. Junior completed
his BA in English in April and unable to find work in his field, has been working at Starbucks and had
employment income for the year of $14,000. He was in school for 4 full time months during the year and
his father paid $3,000 in tuition on his behalf. Last year Isaac suffered a head injury while skiing and,
while his doctor does not consider him disabled, he is not capable of supporting himself financially. Isaac
had no income during the year although he did take some first year business classes at the local college,
he was in school part time for four months of the year at a tuition cost of $800. Both Karen and Jacob
attended a two week course on local flora and fauna at the community centre during the summer, the
cost was $400 per child for the course. Medical expenses for the family were as follows: John ($1,400),
Junior ($0), Isaac ($7,000), Karen ($5,400) and Jacob ($300).
5
Modified from Chapter 4 Tax Credits Question (based on prior year text question)
Phil Cousteau is 47 years old and earned $170,000 as an accountant in 2020. His employer withheld maximum CPP
and EI contributions. Other information pertaining to 2020 is as follows:
1.
Mr. Cousteau’s spouse Claire is 45 years old and blind. She has Net Income for Tax Purposes in 2020 of
$9,000, all of which is interest on investment she inherited from her mother.
2.
Phil and Claire have two children, a 15 year old daughter, Haley, and a 19 year old son, Manny. Both
Haley and Manny live at home. Haley earned $800 during 2020 babysitting.
3.
Manny has a disability that is not severe enough for his doctor to sign off on the T2201 form. Manny
inherited investments from his grandmother and received $15,000 in interest income from them during
2020.
4.
Phil’s brother, Cameron, lives in the basement of Phil’s Toronto home. Cameron is 50 years old and his
only income for 2020 was EI benefits payments totalling $3,000. Phil also supports his 85 year old father,
Jay, who is physically infirm and lives in a retirement home. Jay had Net Income for Tax Purposes of
$9,000 for 2020.
5.
During 2020, the following amounts were deducted from Phil’s pay:
Group Life Insurance Premiums
Registered Pension Plan
United Way Donations
6.
During 2020, Phil paid the following amounts of eligible medical expenses:
Himself
Claire
Haley
Manny
Cameron
Jay
7.
600
1,200
1,500
$ 650
1,940
860
1,250
480
990
Claire also made a $500 donation to their church during 2020.
Required:
Calculate the maximum amount of 2020 federal personal tax credits that are available to Phil Cousteau.
6
Michael “Punchy” Pool, age 53, is a widowed father of three. In 2020 he had net income for tax
purposes of $280,000, made up of $260,000 in employment income from his job as a lawyer and
$20,000 from investment income. The following additional information relates to the 2020 taxation
year:
1) Punchy’s eldest child is Michael Junior, age 23. Junior graduated from University last year with a
BA in Sociology and being unable to find work in his field was forced to move back in with his
father. He has $27,000 in unused tuition credits carried over from prior years. As his father
won’t give him an allowance, Junior works part time at Starbucks to earn beer money. In 2020
he earned $11,000. Junior also had medical expenses during the year of $2,200, entirely paid
for by his father.
2) The second child is Rebecca, age 19. Rebecca is currently attending UCLA, at a tuition cost of
$34,000 for the year. During the year, Rebecca earned $5,000 from an on campus job. She also
had medical costs of $100, which she paid for herself.
3) The youngest child is Timothy, age 14. Tim was in an accident when he was five and he now has
some mobility difficulty that while it qualifies as an infirmity does not meet the requirements for
a disability. During the year Tim had income of $3,000 from investments he inherited from his
grandfather. Punchy spent $8,000 on medical expenses for Tim during 2020.
4) Punchy volunteers with both the local fire department and the local search and rescue. In 2019
he volunteered 210 hours with the fire department and 244 hours with search and rescue.
5) Punchy donated $20,000 to the Heart and Stroke Foundation of BC in 2020. The Heart and
Stroke Foundation is a registered Canadian charity.
6) Wanting to cover all bases, Punchy contributed $500 to the Conservative Party of Canada, $500
to the Liberal Party of Canada and $500 to the New Democratic Party of Canada. All three are
registered federal political parties.
Calculate the maximum federal tax credits available to Punchy. Assume that all available transfers are
made.
7
Mid Term Review Questions – Solutions
!. The Case A solution would be calculated as follows:
Income Under ITA 3(a):
Employment Income
Property Income
Income Under ITA 3(b):
Taxable Capital Gains
[(1/2)($18,000)]
Allowable Capital Losses
[(1/2)($12,000)]
$80,000
12,000
$92,000
$9,000
( 6,000)
3,000
Balance From ITA 3(a) And (b)
Subdivision e
$95,000
(6,000)
Balance From ITA 3(c)
Deduction Under ITA 3(d):
Net Business Loss
$89,000
(10,000)
Net Income For Tax Purposes (Division B Income)
$79,000
In this Case, Andre has no loss carryovers
Case B
The Case B solution would be calculated as follows:
Income Under ITA 3(a):
Employment Income
Income Under ITA 3(b):
Taxable Capital Gains
[(1/2)($34,000)]
Allowable Capital Losses
[(1/2)($45,000)]
$42,000
$17,000
( 22,500)
Nil
Balance From ITA 3(a) And (b)
Subdivision e
$42,000
(12,000)
Balance From ITA 3(c)
Deduction Under ITA 3(d):
Rental loss
Unincorporated Business Loss
$30,000
Net Income For Tax Purposes (Division B Income)
( 8,000)
( 67,000)
Nil
In this Case, Andre has an unused business loss carry over of $45,000 and an allowable capital loss carry over of
$5,500.
Q. 2
Base salary
$95,000
Commissions
12,000
RPP Contributions by employer
Nil
Disability – note 3
Nil
Life insurance premiums paid by employer
500
Cheese of the month
Nil
Lexus standby (2% X 83,000 X 4) Note 2
6,640
Lexus operating (20,000 X .28)
5,600
Prius standby ((2/3 X (315 X 6)) X (2,000/(6X1,667)))
252
Prius operating (252/2)
126
Financial planner
Nil
Employment deductions Note 1(see below)
(12,750)
RPP Contributions
(5,000)
Net employment income
102,368
Employment deductions are the greater of:
f
Travel (less 50% of meals) 12,750
Client entertainment (50%) 3,000
Promotional expenses
2,000
17,750
h & h.1
12,750
0
0
12,750
Notes
1)While f is greater it is capped at sales commissions ($12,000). We therefore make the claim under h&h.1
2)For the Lexus Bob is not eligible for reduced standby as his employment related car use was not over 50%,
therefore also not eligible for reduced OCB
For the Prius, his employment related use is greater than 50% therefore he is eligible for both reduced standby and
reduced OCB
3)As the group disability is entirely paid by the employees, any receipt from the plan is non-taxable.
Q. 3
Base salary
Commissions
$35,000
194,000
Under ITA 8(1) (i) and (j) – Any employee
Financing Costs
[(28,386/47,310)($2,200]
CCA [(28,386/47,310)($5,355)]
Home Office Costs:
1,320
3,213
Maintenance 1,500 x .20
Utilities
2,200 x .20
300
440
Total
Under 8 (1) (f) restricted to $194,000
Home office
Property tax 2,000 x .20
Insurance 1,700 x .20
(5,273)
400
340
Auto expenses
Operating 6,400 X 28,386/47,310
Maintenance 900 x 28,386/47,310
3,840
540
Travel
Hotels
Airfare
Car rental
Meals (50%)
Meals with clients (50%)
Gifts for clients
Bribes (not deductible)
7,200
4,500
1,250
1,500
2,400
1,800
Nil
(23,770)
Net employment income
Bribes are not deductible
199,957
Q. 4
Base Salary
RPP Contributions
Gas Allowance
Auto gas (3,150 X 24,000/40,000)
Auto operating (1,200 X 24,000/40,000)
Auto CCA (4,500 X 24,000/40,000)
Employment parking – Note 1
Gift certificate
Tim Tebow helmet (2,000 – 500)
Frequent flyer miles – Note 2
Flower Arranging for Beginners
Leadership course – employment related
Gym membership
CPA dues
Employment hotel and travel
Net employment income
$140,000
(6,000)
3,600
(1,890)
(720)
(2,700)
(200)
400
1,500
NIL
900
NIL
720
(1,400)
(2,200)
$132,010
Note 1: as he is required to travel away from employers business and has form T2200 completed he is allowed to
deduct the cost of parking.
Note 2: Frequent flyer not a taxable benefit as not converted to cash or used as remuneration
Q. 5
a)
Basic personal
Canada employment
CPP
EI
Political contribution (400 X 75% + 350 X 50% + 250 X 33%))
13,229
1,245
2,732
856
18,062
X 15%
2,709
558
3,267
b) Basic personal
Spousal
Disability- Sunshine
Disability supplement – Sunshine
Canada caregiver – Sunshine
13,229
13,229
8,576
5,003
2,273
42,310
X 15%
6,347
c)
13,229
1,245
2,732
856
5,000
23,062
X 15%
3,459
Basic personal
Canada employment
CPP
EI
Tuition (max)
Tuition
8,000
Transfer
(5,000)
Carryforward
3,000
All of Brian’s income is covered by his basic personal so he is able to transfer the full amount
d) Basic personal
Age (7,637 – 15%(45,000 – 38,508))
Pension
Spousal (13,229 – 9,000)
Spouse’s pension
Spouse’s age
Fire-fighter
Charitable donations (200 X 15% + 800 X 29%)
e)
Basic personal
Canada employment
CPP
EI
Eligible dependent (Karen or Jacob)
Canada Caregiver
Medical (John, Karen and Jacob( 7100 – 2,397)
Isaac Medical ( no income so no 3% deduction)
Isaac tuition
Junior education (see below)
Junior
Tuition
Used by Junior (14,000 – 13,229)
13,229
6,663
2,000
4,229
2,000
7,637
3,000
38,758
X 15%
5,814
262
6,076
13,229
1,245
2,732
856
13,229
7,276
4,703
7,000
800
2,229
53,299
X 15%
7,995
3,000
(771)
2,229
Mr. Cousteau’s credits available:
Basic Personal Amount
$12,944
(13,229 – 931(170,000 – 150,473)/63,895
Spousal Including Infirm Amount
($13,229 + $2,273 – $9,000)
6,502
Additional Caregiver Amount (Note 1)
774
Disability Transfer from Spouse
8,576
Canada Caregiver (Note 2)
Manny And Jay [(2)($7,276)]
14,552
CPP
2,732
EI
856
Canada Employment
1,245
Medical Expenses (Note 3)
2,963
$51,144
Rate
15%
Charitable Donations
[(15%)($200) + (29%)($1,500 + $500 – $200)]
Federal Tax Credits available
7,672
552
$ 8,224
Note 1 As the income adjusted spousal amount is less than the Canada caregiver amount, there
is an additional amount of $774 ($7,276 – $6,502).
Note 2 Both Manny and Jay qualify for the Canada caregiver credit because they are
infirm. As neither has income in excess of the Canada caregiver income threshold, the full
Canada caregiver amount is available for each.
Note 3 The base for the medical expense tax credit can be calculated as follows:
Phil, Claire, and Haley ($650 + $1,940 + $860)
Reduced By The Lesser Of:
[(3%)(170,000)] = $5,100
2020 Threshold Amount = $2,397
Manny
Reduced By The Lesser Of:
[(3%)($15,000)] = $450
$2,397
$1,250
Cameron
Reduced By The Lesser Of:
[(3%)($3,000)] = $90
$2,397
$480
Jay
Reduced By The Lesser Of:
[(3%)($9,000)] = $270
$2,397
Total
( 450)
(
90)
$3,450
( 2,397)
800
390
$990
( 270)
720
$2,963
Punchy’s Tax credits
Basic Personal Amount
Employment
EI
CPP
Medical
Eligible dependent (13,229 + 2,273– 3,000)
Volunteer Firefighter
Tuition – Rebecca
Charity
Political (400 x 75% + 350 X 50% + 525 X 33%)
Federal tax credit
Medical
Timmy – Medical expenses
Less: lesser of 3% X 280,000
Annual max
8,400
2,397
Junior – Medical expenses
Less lesser of 3% X 11,000 or 2,397
2,200
(330)
12,298
1,245
856
2,732
7,473
12,502
3,000
5,000
45,106
X 15%
6,766
6,564
650
13,980
8,000
(2,397)
5,603
1,870
7,473
Charity
200 X 15%
33 % of Lesser of
20,000 – 200 =
280,000 – 214,368
30
19,800
65,632
6,534
6,564

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