Canadian Tax Principles

INSTRUCTOR'S SOLUTIONS MANUAL
Byrd & Chen's Canadian Tax Principles
2011 - 2012 Edition
ISBN-13: 9780132827195; ISBN-10: 0132827190
Copyright © 2011 Clarence Byrd Inc. All rights reserved.
This work is protected by Canadian copyright laws and is provided solely for the use of instructors in teaching their courses and assessing student learning. Please visit the web site (URL below) for the procedures required to authorize limited on-line posting of Assignment Problem solutions.

www.pearsoncanada.ca/byrdchen/ctp2012

zle hz The Instructor’s password protected web site can be accessed by clicking on the
Instructor Resources jump link on the above web page.
Here you will find:
•
•
•
•

Updates and corrections to the supplements package
PowerPoint
slide presentations for all chapters
Online posting policy for assignment problem solutions and permission form
Solutions to Tax Software Problems, updated for the 2011 version of ProFile
(January, 2012)

Problem Concordance

d

A concordance of the problems in the 2010/11 vs. 2011/12 editions is available after the Problem Listing (and on the instructor’s web site) to assist instructors who have previously used Canadian Tax Principles.

Bookmarks In PDF File

To assist you in navigating through the electronic version of this solutions manual,
(available on the Instructor’s CD-ROM) there are bookmarks on the first page of each Assignment Problem solution.

Contact Information
Comments and queries from instructors should be e-mailed to Ida Chen at: [e-mail] If you have any further questions, please contact Nicole Lukach, Acquisitions Editor,
Pearson Canada, at:
[e-mail]

ii

Solutions Manual Problem Listing

Assignment Problems Listing and Description
Next to each problem number you will find a general indication as to whether the problem is: Easy(E), Medium (M), or Difficult (D).

Chapter 1
Introduction To Federal Taxation In Canada
Subject
Application of general tax principles
Conflicting objectives
Qualitative characteristics of tax systems
Evaluation of head tax
Net income and taxable income
Alternative views of income
Net Income For Tax Purposes
Net Income For Tax Purposes

zle hz Solution
1-1 (M)
1-2 (M)
1-3 (M)
1-4 (M)
1-5 (E)
1-6 (E)
1-7 (M)
1-8 (M)

Page
1
2
3
4
5
6
7
8

Chapter 2
Procedures And Administration

2-1
2-2
2-3
2-4
2-5
2-6
2-7

(E)
(M)
(M)
(M)
(E)
(M)
(M)

Individual tax instalments
Corporate tax instalments
Individual tax instalments
Corporate tax instalments
Filing dates
Appeals
Tax preparer’s liability

9
10
11
12
14
15
16

d

Chapter 3
Income Or Loss From An Office Or Employment
3-1
3-2
3-3
3-4
3-5
3-6

(E)
(E)
(M)
(M)
(M)
(M)

3-7 (M)
3-8 (D)
3-9 (E)
3-10 (M)
3-11 (D)
3-12 (D)

Bonus arrangements
Employee vs. self-employed
Employee automobile benefits
Employee automobile benefits
Employee automobile benefits
Loans to employees

17
18
19
20
21
22

Employee stock options
Employment income - commission income
Employment income
Employment income (Extended in Assignment Problem 4-4)
Alternative employment offers
Comprehensive employment income

23
25
27
28
29
31

Solutions Manual Problem Listing

Chapter 4
Taxable Income And Tax Payable
For Individuals
Solution
4-1 (E)
4-2 (E)
4-3 (M)
4-4 (M)
4-5 (D)
4-6 (D)

Subject
Personal tax credits - 5 Cases
Personal tax credits - 5 Cases
Personal tax credits - 5 Cases
Calculation of individual taxable income and tax payable
(Extension of Assignment Problem 3-10)
Calculation of individual taxable income and tax payable
Calculation of individual taxable income and tax payable

Tax Software Assignment Problems
4-1 (M)
ProFile T1 software case for 2010
(Extended in Tax Software Assignment Problem 11-1)

4-3 (M)

zle hz 4-2 (D)

Page
33
35
38
41
43
46

49

ProFile T1 software case for 2010
(Extended in Tax Software Assignment Problem 11-2)

54

ProFile T1 software case for 2010
(Extended in Chapter 6 Tax Software Assignment Problem)

58

Chapter 5
Capital Cost Allowances And
Cumulative Eligible Capital

(M)
(M)
(D)
(D)
(M)

5-6 (M)
5-7 (M)

CCA calculations for M&P assets
CCA calculations for rental properties
CCA calculations for various classes
CCA calculations over 4 years
CCA, CEC and tax planning

63
64
65
68
70

CEC - including disposal election
CCA and CEC calculations

71
72

d

5-1
5-2
5-3
5-4
5-5

iii

iv

Solutions Manual Problem Listing

Chapter 6
Income Or Loss From A Business
Solution
6-1 (E)
6-2 (E)
6-3 (M)
6-4 (M)
6-5 (M)

Subject
Reserves
Valuation of business inventories
Deductible automobile costs and taxable benefits
Business expenses - corporation
Business expenses - proprietorship

6-6 (M)
6-7 (M)
6-8 (M)
6-9 (M)
6-10 (M)
6-11 (M)

Proprietorship - simple business income
Proprietorship - business income
Partnership - business income, employee vs. self-employed
Proprietorship income with CCA
ITA 22 election on Accounts Receivable
Home office costs and CCA

zle hz 6-12 (D)
6-13 (D)

Page
75
76
77
78
79
80
81
82
83
85
86

Comprehensive case (with coverage of preceding chapters)
Comprehensive case (with coverage of preceding chapters)

88
91

Tax Software Assignment Problem
Chap 6 (D)
ProFile T1 software case for 2010
(Extended in Chapter 7 Tax Software Assignment Problem)

93

Chapter 7
Income From Property

(M)
(M)
(E)
(M)
(E)
(M)

Interest deductibility
Rental income including CCA
Interest versus dividends, after tax returns
Investment in income trusts and common stocks
Business and property income
Foreign property income, income trusts and mutual funds

101
102
103
104
105
106

Comprehensive case (with coverage of preceding chapters)
Comprehensive case (with coverage of preceding chapters)

107
110

Tax Software Assignment Problem
Chap 7 (D)
ProFile T1 software case for 2010
(Extended in Chapter 8 Tax Software Assignment Problem)

114

7-7 (D)
7-8 (D)

d

7-1
7-2
7-3
7-4
7-5
7-6

Solutions Manual Problem Listing

Chapter 8
Capital Gains And Capital Losses
Subject
Identical properties
Warranties and bad debts on capital assets
Capital gain reserves
Capital gain reserves
Short cases on capital gains
Non-arm’s length transactions
Involuntary dispositions

8-8 (D)
8-9 (E)
8-10 (D)
8-11 (E)
8-12 (D)
8-13 (E)
8-14 (M)
8-15 (E)

Voluntary dispositions
Deferral on small business investments
Changes in use - CCA
Departure from Canada
Deemed disposition at death including real property
Principal residences
Personal use property
Capital gains on foreign securities

136
139
140
142
143
146
147
148

Comprehensive case (with coverage of preceding chapters)
Comprehensive case (with coverage of preceding chapters)

149
152

Tax Software Assignment Problem
Chap 8 (D)
ProFile T1 software case for 2010
(Extended in Chapter 9 Tax Software Assignment Problem)

155

8-16 (D)
8-17 (D)

zle hz Solution
8-1 (E)
8-2 (E)
8-3 (M)
8-4 (M)
8-5 (E)
8-6 (M)
8-7 (M)

Page
125
126
127
129
131
132
134

9-1
9-2
9-3
9-4
9-5
9-6
9-7
9-8

(E)
(M)
(M)
(M)
(D)
(M)
(E)
(D)

9-9 (D)
9-10 (D)

d

Chapter 9
Other Income, Other Deductions, Income Attribution
Death benefits
Other income and deductions, including RESP
Moving expenses
Child care expenses
Pension income splitting
Transfers to a spouse - income attribution
Income attribution
Gifts and income attribution

161
162
164
165
166
168
169
170

Comprehensive case (with coverage of preceding chapters)
Comprehensive case (with coverage of preceding chapters)

173
178

Tax Software Assignment Problem
Chap 9 (D)
ProFile T1 software case for 2010
(Extended in Chapter 10 Tax Software Assignment Problem)

181

v

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Solutions Manual Problem Listing

Chapter 10
Retirement Savings
Solution
10-1 (M)
10-2 (D)
10-3 (E)
10-4 (E)
10-5 (E)
10-6 (M)
10-7 (E)

Subject
RRSP contributions
RRSPs, TFSAs and tax planning
RRSP contributions
RRSP contributions
Excess RRSP contributions
Retiring allowances
Pension Adjustments and Past Service Pension Adjustments

Page
195
197
198
199
200
201
202

10-8 (D)
10-9 (D)

Comprehensive case (with coverage of preceding chapters)
Comprehensive case (with coverage of preceding chapters)

203
207

d

zle hz Tax Software Assignment Problem
Chap 10 (D) ProFile T1 software case for 2010
(Extended in Tax Software Assignment Problem 11-3)

210

Solution To AP One - 1

CHAPTER ONE SOLUTIONS
Solution to Assignment Problem One - 1
Note To Instructor If you are assigning this problem, note that only the first two answers can be found in Chapter 1 of the text.
The circumstances under which a general provision of the Income Tax Act can be overridden are as follows:
1. In those situations where there is a conflict between the provisions of an international tax treaty and the Income Tax Act, the terms of the international tax treaty will prevail.
2. While court decisions cannot be used to change the actual tax law, court decisions may call into question the reasonableness of interpretations of the ITA made by either the CRA or tax practitioners.

d

zle hz 3. In some cases, a more specific provision of the Act will contain an exception to a general rule. For example, while ITA 18(1)(b) does not allow the deduction of capital expenditures in computing business income, ITA 20(1)(aa) contains a provision that allows the deduction of landscaping costs.

Canadian Tax Principles 2011/2012 - Solutions Manual

1

Solution To AP One - 2

Solution to Assignment Problem One - 2
Some of the possible examples of conflicts between objectives would be as follows:
1. Revenue Generation And International Competitiveness The need to lower rates of taxation in order to be competitive on an international basis is in conflict with the need to generate revenues.
2. Fairness And Simplicity In order to make a tax system simple, a single or small number of tax rates must be applied to a well established concept of income with only a limited number of deductions or exceptions available. This is in conflict with the goal of tailoring the system to be fair to specific types of individuals, such as the disabled.
3. Revenue Generation And Social Goals The desire to provide funds to certain types of individuals (Old Age Security) or to provide certain types of services (health care) may be in conflict with the need to generate tax revenues.
4. Flexibility And Certainty To make a tax system flexible in changing economic, political, and social circumstances, there must be some uncertainty.

d

zle hz 2

Canadian Tax Principles 2011/2012 - Solutions Manual

Solution To AP One - 3

Solution to Assignment Problem One - 3
A. Diamonds, South Africa In a monopoly, the tax will probably be entirely shifted to employees and/or consumers. The incidence shift will depend on competition in world markets and employment levels. If the international diamond market is price sensitive and there is high unemployment in South Africa, then the tax will be shifted almost entirely to employees.
The shifting assumptions affect evaluation of the tax using the characteristics of a “good” tax system. A tax that is entirely shifted to employees is similar to one on wages and is non-neutral, as it affects the decisions of employees to continue working . Some employees will work less and thus increase the excess burden resulting from imposition of the tax.
B. Diamonds, Sierra Leone The taxing authorities will find it difficult to enforce the tax, due to their inability to track diamond movements. Records maintained by the mine will likely be inaccessible, and those presented will be incomplete. The tax will not be effective and the tax revenue will be uncertain and inadequate.

zle hz C.
Principal Residences, Canada This exemption is non-neutral because investment decisions are affected by the tax preference. Given the choice of investing in real estate to hold for resale or a principal residence, both of which are likely to appreciate, a taxpayer will invest in a principal residence so that the gain on disposition is tax exempt.
It is also vertically inequitable because it benefits high-income families who can invest in more expensive residences which have the potential of earning greater returns.
This tax expenditure is spread among all taxpayers, and general tax revenue must be larger to compensate for the revenue foregone.
D. Business Meals, Canada This restriction adds complexity to accounting for deductible expenses, as all business meals have to be accounted for and accumulated separately from other promotion expenses. The tax could be shifted to consumers, employees and/or shareholders. If it is shifted to consumers, it could be more advantageous to raise personal taxes so that incidence is more certain. If it is shifted to shareholders or employees, then it would be non-neutral as it could affect investment decision making and willingness to work.

d

E. Head Tax A head tax is neutral as it does not affect economic choices. However, it
is vertically inequitable, based on the ability to pay concept of equity, as all taxpayers, regardless of their income levels are taxed the same. The head tax is very inelastic. This tax serves the objectives of certainty, simplicity and ease of compliance. It could promote stability in the economy.

Canadian Tax Principles 2011/2012 - Solutions Manual

3

Solution To AP One - 4

Solution to Assignment Problem One - 4
There are a large number of possible responses to a question such as this. Some possibilities would include the following:
Simplicity And Ease Of Compliance A very good feature of this tax is that it is very simple and presents the taxpayer with no compliance problems. Anyone with a head is taxed and no provisions have been made for any modifications in applicability or amounts to be paid.

·

Fairness And Equity In one sense this is a fair tax in that it applies to every Canadian resident and the amount to be collected from each individual is the same. This could be described as horizontal equity. However, the tax could also be considered unfair in that it gives no consideration to the individual’s ability to pay the tax, either in terms of accumulated wealth or income.

·

Regressiveness Related to fairness is the fact that the tax is regressive. That is, the tax will take a higher percentage of income from low income individuals than it will from high income individuals.

·

Flexibility And Elasticity Being a very simple tax, it will be very easy to change the rate at which it is assessed. However, as it is a flat tax based simply on the existence of the individual, it will not respond to changing economic conditions.

·

Enforcement And Dependability Of Revenues Given the presence of a physically visible audit trail (the HAT), there should be no enforcement problems. Further, demographic statistics are reasonably predictable, making it relatively easy for the government to anticipate the expected levels of revenue.

·

Neutrality Other than decisions related to whether to remain a Canadian resident, the tax appears to be neutral with respect to economic conditions.

·

International Competitiveness It seems unlikely that a $200 tax would be sufficient to influence a decision to either leave Canada or move to Canada. Therefore, the tax could be thought of as being internationally competitive.

·

Balance Between Sectors The tax might be criticized as an additional burden on Canadian individuals as opposed to Canadian businesses.

d

zle hz ·

There are, of course, other factors that could be considered.

4

Canadian Tax Principles 2011/2012 - Solutions Manual

Solution To AP One - 5

Solution to Assignment Problem One - 5
The term Net Income For Tax Purposes is commonly used to refer to income as determined under Part I, Division B of the Income Tax Act. While Division B does not contain a definition of this income figure, ITA 3 contains a formula for the determination of this amount. In general terms, Net Income For Tax Purposes would include:
·

Net income from employment (Subdivision a).

·

Net income from business or property (Subdivision b).

·

Taxable capital gains net of allowable capital losses (Subdivision c).

·

Other sources of income and other deductions (Subdivisions d and e).

Losses from employment, business, property, and allowable business investment losses can be deducted as long as the total Net Income For Tax Purposes does not go below zero.
In somewhat simplified terms, Taxable Income is simply Net Income For Tax Purposes, less certain deductions that are specified in Division C of the Income Tax Act . As will be explained in subsequent Chapters, these deductions include loss carry overs from other years, a portion of stock option income, the northern residents deduction, and home relocation loan amounts. d

zle hz Canadian Tax Principles 2011/2012 - Solutions Manual

5

Solution To AP One - 6

Solution to Assignment Problem One - 6
Accountant’s View
The accountant’s definition uses historical cost accounting following GAAP. Under GAAP, revenue is generally recognized when goods are sold or services delivered. Expenses are then matched against these revenues, with the resulting difference referred to as accounting Net
Income.
Economist’s View
The economist’s definition of income includes all gains, whether realized or unrealized, as increases in net economic power.

d

zle hz Income Tax Act View
Conceptually, the ITA view is very similar to the accountant’s view. However, there are many differences which result from the application of complex rules in the ITA. For example, a portion of capital gains is not considered to be Taxable Income under the ITA view. In contrast, both accountants and economists would include 100 percent of such gains in income. Note, however, the timing would be different as economists would tend to recognize such gains prior to the realization. Accountants generally do not recognize capital gains until they are realized through a disposition of the relevant asset.

6

Canadian Tax Principles 2011/2012 - Solutions Manual

Solution To AP One - 7

Solution to Assignment Problem One - 7
Case A
The Case A solution would be calculated as follows:
Income Under ITA 3(a):
Employment Income
Business Income

$46,200
13,500

Income Under ITA 3(b):
Taxable Capital Gains
Allowable Capital Losses

$59,700

$14,320
( 23,460)

Balance From ITA 3(a) And (b)
Spousal Support Payments

Nil
$59,700
( 4,800)

Balance From ITA 3(c)
Deduction Under ITA 3(d):
Net Rental Loss

$54,900
(

Net Income For Tax Purposes (Division B Income)

2,350)
$52,550

zle hz In this Case, Christina has an unused allowable capital loss carry over of $9,140 ($14,320 $23,460). The roulette winnings would not be included in income and the related expenses would not be deductible.

Case B
The Case B solution would be calculated as follows:
Income Under ITA 3(a):
Employment Income
Interest Income
Net Rental Income

Income Under ITA 3(b):
Taxable Capital Gains
Allowable Capital Losses

$32,420
( 29,375)

d

Balance From ITA 3(a) And (b)
Deductible RRSP Contribution

$64,000
2,600
4,560

Balance From ITA 3(c)
Deduction Under ITA 3(d):
Partnership Business Loss [(50%)($144,940)]

Net Income For Tax Purposes (Division B Income)

$71,160

3,045
$74,205
( 12,480)
$61,725
( 72,470)
Nil

In this Case, Christina has an unused business loss carry over of $10,745 ($72,470 - $61,725).

Canadian Tax Principles 2011/2012 - Solutions Manual

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Solution To AP One - 8

Solution to Assignment Problem One - 8
Case A
The Case A solution would be calculated as follows:
Income Under ITA 3(a):
Employment Income
Interest Income

$46,700
3,500

Income Under ITA 3(b):
Taxable Capital Gains
Allowable Capital Losses

$50,200

$13,470
( 10,450)

Balance From ITA 3(a) And (b)
Spousal Support Payments [(12)($500)]

3,020
$53,220
( 6,000)

Balance From ITA 3(c)
Deductions Under ITA 3(d):
Net Rental Loss
Business Loss

$47,220
( 22,250)
( 37,260)

Net Income For Tax Purposes (Division B Income)

Nil

zle hz In this Case, Christophe has a non-capital loss carry over of $12,290 ($47,220 - $22,250 $37,260). The provincial lottery winnings would not be included in Christophe’s Net Income
For Tax Purposes as they are not subject to tax.

Case B
The Case B solution would be calculated as follows:
Income Under ITA 3(a):
Employment Income
Interest Income

$75,400
4,560

Income Under ITA 3(b):
Taxable Capital Gains
Allowable Capital Losses

$8,725
( 9,460)

Balance From ITA 3(c)
Deduction Under ITA 3(d):
Net Rental Loss

d

Balance From ITA 3(a) And (b)
Child Care Costs
RRSP Contributions
Spousal Support Payments

$79,960

Nil
(
(
(

$79,960
4,520)
6,570)
3,600)
$65,270

( 12,200)

Net Income For Tax Purposes (Division B Income)

$53,070

In this Case, Christophe has an allowable capital loss carry over of $735 ($8,725 - $9,460).

8

Canadian Tax Principles 2011/2012 - Solutions Manual

Solution To AP Two - 1

CHAPTER TWO SOLUTIONS
Solution to Assignment Problem 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. Mr. Grafton’s net tax owing figures are as follows:
2009 = $1,700 ($31,500 - $29,800)
2010 = $8,400 ($14,600 - $6,200)
2011 = $3,100 ($27,400 - $24,300) Estimated
As Mr. Grafton’s net tax owing in 2011 (the current year) and his net tax owing in 2010 (one of the two preceding years) is greater than $3,000, he is required to make instalment payments.

zle hz Amounts
If Mr. Grafton bases the first two quarterly payments on the 2009 net tax owing , they would only be $850 each ($1,700 ÷ 2). However, the payments for the last two quarters would be
$3,350 each {[$8,400 - (2)($850)] ÷ 2}, resulting in total instalment payments of $8,400.
A preferable alternative would be to base the payments on the net tax owing for 2011. These payments would be $775 each ($3,100 ÷ 4), for a total of $3,100.

Payment Dates
The quarterly payments would be due on March 15, June 15, September 15, and December
15.

d
Canadian Tax Principles 2011/2012 - Solutions Manual

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Solution To AP Two - 2

Solution to Assignment Problem Two - 2
Part A
Under ITA 157(1), Lanterna Inc. would have three alternatives with respect to the calculation of its instalment payments. The alternatives and the relevant calculations are as follows:
Estimated Current Year’s Tax Payable The instalment payments could be based on
1/12th of the estimated Tax Payable calculated at current rates on the estimated
Taxable Income for the current year. In this case the resulting instalments would be
$3,288.33 per month ($39,460 ÷ 12).
Preceding Year’s Tax Payable The instalment payments could be based on 1/12th of the Tax Payable in the immediately preceding taxation year. The resulting instalments would be $3,476.67 ($41,720 ÷ 12).

zle hz Preceding One And Two Year’s Tax Payable The third alternative would be to base the first two instalments on 1/12th of the Tax Payable in the second preceding year and the remaining instalments on 1/10th of the Tax Payable in the preceding year, less the total amount paid in the first two instalments. In this case, the first two instalments would be $2,720.83 ($32,650 ÷ 12) each, a total of $5,441.66. The remaining 10 instalments would be $3,627.83 [($41,720 - $5,441.66) ÷ 10] each. The total instalments under this approach would be $41,720.
While the third approach would provide the lowest payments for the first two instalments, the payments would total $41,720. As this is significantly larger than the $39,460 total when the instalments are based on the current year’s Tax Payable, the use of the current year’s Tax
Payable approach would be the best alternative.

Part B
If the Company failed to make instalment payments towards the 2011 taxes payable, it would be liable for interest from the date each instalment should have been paid to the balance due date, September 30, 2011.
d

Assuming the actual 2011 taxes payable are $39,460, 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.
Interest on the entire balance of $39,460 of taxes payable would be charged beginning on the balance due date, September 30, 2011. 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 no penalty for late payment of taxes, provided a return has been filed. If no return
is filed, 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.
The 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. In addition, interest would be charged on the penalty until such time as the return is filed.

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Canadian Tax Principles 2011/2012 - Solutions Manual

Solution To AP Two - 3

Solution to Assignment Problem Two - 3
While there are alternatives in all Cases, the following answers represent the “minimum” instalments, as required in the problem.

Case One
Ms. Skurnick’s net tax owing in each of the three years is as follows:
2009 = $9,600 ($28,800 - $19,200)
2010 = $7,040 ($23,040 - $16,000)
2011 = $5,600 ($21,600 - $16,000) Estimated
As her net tax owing is expected to exceed $3,000 in 2011 and was more than $3,000 in both
2009 and 2010, the payment of instalments is required.
Using the 2011 estimate would result in minimum instalment payments. Based on this year, the required quarterly instalments would be $1,400 ($5,600 ÷ 4).
They would be due on March 15, June 15, September 15, and December 15. They would total
$5,600.

zle hz Case Two
Ms. Skurnick’s net tax owing in each of the three years is as follows:
2009 = $17,600 ($28,800 - $11,200)
2010 = Nil (Withholdings Exceed Tax Payable)
2011 = $7,200 ($21,600 - $14,400) Estimated

As her net tax owing is expected to exceed $3,000 in 2011 and was more than $3,000 in 2009, the payment of instalments is required.
Using the 2010 net tax owing would result in minimum instalment payments. Based on this year, the required quarterly instalments would be nil.

Case Three
Ms. Skurnick’s net tax owing in each of the three years is as follows:

d

2009 = $1,300 ($28,800 - $27,500)
2010 = $6,840 ($23,040 - $16,200)
2011 = $3,400 ($21,600 - $18,200) Estimated

As her net tax owing is expected to exceed $3,000 in 2011 and was more than $3,000 in 2010, the payment of instalments is required.
Using the 2011 net tax owing would result in minimum instalment payments. Based on this year, the required quarterly instalments would be $850 ($3,400 ÷ 4). While using the 2009 net tax owing would result a figure of $325 ($1,300 ÷ 4) for the first two instalments, the last two instalments would be $3,095 each {[$6,840 - (2)($325)] ÷ 2}.
This would result in total instalments of $6,840, significantly larger than the $3,400 that would result from using the current year estimate of net tax owing .
They would be due on March 15, June 15, September 15, and December 15. They would total
$3,400.

Canadian Tax Principles 2011/2012 - Solutions Manual

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Solution To AP Two - 4

Solution to Assignment Problem Two - 4
Case One
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, instalments will be quarterly. 2. The three acceptable alternatives would be as follows:
·
·
·

Quarterly instalments of $27,405 ($109,620
Quarterly instalments of $31,290 ($125,160
One instalment of $25,305 ($101,220 ÷ followed by three instalments of $33,285
$125,160.

÷ 4) based on the current year estimate.
÷ 4) based on the first preceding year.
4) based on the second preceding year,
[($125,160 - $25,305) ÷ 3], a total of

3. The best alternative would be four instalments of $27,405, for total payments of
$109,620. The instalments are due on March 31, June 30, September 30, and December
31, 2011.

zle hz Case Two
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, instalments will be quarterly. 2. The three acceptable alternatives would be as follows:
·
·
·

Quarterly instalments of $27,405 ($109,620 ÷ 4) based on the current year estimate.
Quarterly instalments of $26,075 ($104,300 ÷ 4) based on the first preceding year.
One instalment of $25,305 ($101,220 ÷ 4) based on the second preceding year, followed by three instalments of $26,331.67 [($104,300 - $25,305) ÷ 3], a total of $104,300.

3. The best alternative would be one payment of $25,305, followed by three payments of
$26,331.67. While the total instalments are the same $104,300 in both the second and third alternatives, the third alternative is preferable because the first payment is lower.
The instalments are due on March 31, June 30, September 30, and December 31, 2011.

d

Case Three
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 instalments are required.
2. The three acceptable alternatives would be as follows:
·
·
·

Monthly instalments of $9,135 ($109,620 ÷ 12) based on the current year estimate.
Monthly instalments of $10,430 ($125,160 ÷ 12) based on the first preceding year.
Two monthly instalments of $8,435 ($101,220 ÷ 12) based on the second preceding year, followed by 10 monthly instalments of $10,829 {[($125,160 - (2)($8,435)] ÷ 10}, a total of $125,160.

3. The best alternative would be 12 instalments of $9,135, resulting in a total of $109,620 of instalment payments.
The instalments would be due on the last day of each month, beginning in January, 2011.

12

Canadian Tax Principles 2011/2012 - Solutions Manual

Solution To AP Two - 4
Case Four
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 instalments are required.
2. The three acceptable alternatives would be as follows:
·
·
·

Monthly instalments of $9,135 ($109,620 ÷ 12) based on the current year estimate.
Monthly instalments of $8,691.67 ($104,300 ÷ 12) based on the first preceding year.
Two monthly instalments of $8,435 ($101,220 ÷ 12) based on the second preceding year, followed by 10 monthly instalments of $8,743 {[($104,300 - (2)($8,435)] ÷ 10}, a total of $104,300.

3. The best alternative would be two payments of $8,435, followed by ten payments of
$8,743. While the total instalments are the same $104,300 in both the second and third alternatives, the third alternative is preferable because the first two payments are lower.
The instalments would be due on the last day of each month, beginning in January, 2011.

d

zle hz Canadian Tax Principles 2011/2012 - Solutions Manual

13

Solution To AP Two - 5

Solution to Assignment Problem Two - 5
Part A
For individuals, the taxation year is always the calendar year. Individuals without business income are required to file their tax returns no later than April 30 of the year following the relevant taxation year. For individuals with business income, and their spouse or common-law partner, the filing deadline is extended to June 15.
Part B
The general rules are the same for both deceased and living individuals. That is, the return must be filed no later than April 30 of the year following the year of death. If the deceased individual, or his spouse or common-law partner had business income, the due date is June 15 of the year following the year of death.
However, when death occurs between November 1 of a taxation year and the normal filing date for that year’s return, representatives of the deceased can file the return on the later of the normal filing due date (April 30th or June 15th of the following year) and six months after the date of death.

zle hz Part C
Testamentary trusts are permitted to use a non-calendar fiscal year as their taxation year. In contrast, inter vivos trusts must use the calendar year as their taxation year. Without regard to the type of trust, its tax return must be filed within 90 days of the end of the taxation year.
Part D
Corporations can use a non-calendar fiscal year as their taxation year. The corporate T2 return must be filed within six months of the end of the taxation year.

d
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Canadian Tax Principles 2011/2012 - Solutions Manual

Solution To AP Two - 6

Solution to Assignment Problem Two - 6
The following additional information would be relevant in considering Mr. Simon’s situation:
A. Determination of when the notice of reassessment was mailed. A notice of objection must be filed prior to the later of:
·
·

90 days from the date of mailing of the assessment or reassessment; and one year from the due date for the return under assessment or reassessment.

In this case, the later date is clearly 90 days after the mailing of the notice of reassessment.
B. Determination of when the original assessment for the 2007 taxation year was mailed. A three year time limit applies from the date the original assessment was mailed. As the original assessment for 2007 would normally have been mailed after April, 2008, this reassessment is likely within the three year limit.

zle hz C. Determination of whether Mr. Simon has signed a waiver of the three year time limit or if he is guilty of fraud or misrepresentation. If the reassessment is not within the three year time limit, Mr. Simon would not usually be subject to reassessment. However, if Mr.
Simon has signed a waiver of the three year time limit, or if fraud or misrepresentation is involved, he becomes subject to reassessment, regardless of the time period involved.
If the preceding determinations indicate that the reassessment is valid and you decide to accept Mr. Simon as a client, the following steps should be taken:
·

You should have Mr. Simon file a Consent Form, T1013, with the CRA which authorizes you to represent him in his affairs with the CRA.

·

A notice of objection should be filed before the expiration of the 90 day time limit. ·

You should begin discussions of the matter with the relevant assessor at the CRA.

d
Canadian Tax Principles 2011/2012 - Solutions Manual

15

Solution To AP Two - 7

Solution to Assignment Problem Two - 7
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.

d

zle hz 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 donation 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.

16

Canadian Tax Principles 2011/2012 - Solutions Manual

Solution To AP Three - 1

CHAPTER THREE SOLUTIONS
Solution to Assignment Problem Three - 1
The required information for the four Cases included in this problem is as shown in the following table:

Case
Case
Case
Case

Deduction
Empire Inc.
Year Ending September 30

Inclusion
Carl Lange
Calendar Year

2011
2011
2012
2011

2011
2012
2012
2011

A
B
C
D

In Case A, the bonus is deducted when accrued because it is received within 180 days of
Lange Enterprises’ 2011 year end. It is taxed when received.
In Case B, the bonus is deducted when accrued because it is received within 180 days of Lange
Enterprises’ 2011 year end. It is taxed when received.

zle hz In Case C, the bonus is not paid within 180 days of Lange Enterprises’ year end. As a consequence, it cannot be deducted until the year ending September 30, 2012. However, as it is paid within 3 years of Lange Enterprises’ 2011 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 2012.
In Case D, the bonus is not paid until more than 3 years after Lange Enterprises’ 2011 year end. This makes it a salary deferral arrangement, resulting in Mr. Lange having to include it in his 2011 Taxable Income. Lange Enterprises will be able to deduct the bonus in the year ending September 30, 2011.

d
Canadian Tax Principles 2011/2012 - Solutions Manual

17

Solution To AP Three - 2

Solution to Assignment Problem Three - 2
Quantitative Considerations
If the individual’s services are acquired as an employee, the 2011 costs would be as follows:
Basic Salary
Company Benefits [($250,000)(8%)]
CPP (Maximum)
Employer’s Share Of EI [(2.49%)($44,200)]
Payroll Tax [(2%)($250,000)]

$250,000
20,000
2,218
1,101
5,000

Total Cost

$278,319

This is very close to the $280,000 that would have to be paid to the individual if he is classified as an independent contractor.

Other Considerations
While the quantitative factors slightly favour employee classification, this is probably not the best choice. Other factors that should be considered: self-employed status relieves the company from any ongoing commitment beyond the period specified in the contract,

·

Farnham Ltd. would not be legally responsible for any errors in the work of the engineer if he is self-employed,

·

the fact that employment contracts usually require that salary and related benefits grow over time, and

·

the added administrative costs of withholding amounts from his salary if he is an employee. zle hz ·

It would appear to be more advantageous to structure the arrangement so that this individual qualifies as an independent contractor.

d
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Canadian Tax Principles 2011/2012 - Solutions Manual

Solution To AP Three - 3

Solution to Assignment Problem Three - 3
Case A
In this Case, the taxable benefit would be calculated as follows:
Standby Charge [(2%)($28,500)(12)(18,000/20,004)]
Operating Cost Benefit - Lesser Of:
• [(18,000)($0.24)] = $4,320
• [(1/2)($6,155)] = $3,078

$6,155

Total Benefit

$9,233

3,078

As Ms. Smith’s usage is more than 50 percent employment related, she can use the reduced standby charge calculation. In addition, she can use one-half the standby charge as her operating cost benefit.

Case B
In this Case, the taxable benefit would be calculated as follows:
$3,762

Total Benefit

$5,643

zle hz Standby Charge [(2%)($28,500)(10)(11,000/16,667)]
Operating Cost Benefit - Lesser Of:
• [(11,000)($0.24)] = $2,640
• [(1/2)($3,762)] = $1,881

1,881

As Ms. Smith’s usage is more than 50 percent employment related, she can use the reduced standby charge calculation. In addition, she can use one-half the standby charge as her operating cost benefit.

Case C
In this Case, the taxable benefit would be calculated as follows:
$ 3,420
6,792

Total Benefit

$10,212

d

Standby Charge [(2%)($28,500)(6)]
Operating Cost Benefit [(28,300)($0.24)]

As Ms. Smith’s employment usage was less than 50 percent, there is no reduction in the basic standby charge. This also means that Ms. Smith cannot elect to use the alterative calculation of the operating costs benefit as one-half of the standby charge.

Canadian Tax Principles 2011/2012 - Solutions Manual

19

Solution To AP Three - 4

Solution to Assignment Problem Three - 4
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)]
Operating Cost Benefit [(9,000)($0.24)]

$7,200
2,160

Total Taxable Benefit

$9,360

Car B

zle hz Standby Charge [(2/3)(12)($635)(11/12)(6,000/18,337)]
Operating Cost Benefit - Lesser Of:
• [(6,000)($0.24)] = $1,440
• [(1/2)($1,524)] = $762
Payment For Personal Use
Total Taxable Benefit

$1,524

(

762
500)
$1,786

Car C

Standby Charge [(2%)($30,000)(10)(7,000/16,670)]
Operating Cost Benefit - Lesser Of:
• [(7,000)($0.24)] = $1,680
• [(1/2)($2,519)] = $1,260

$2,519

Total Taxable Benefit

$3,779

1,260

d
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Canadian Tax Principles 2011/2012 - Solutions Manual

Solution To AP Three - 5

Solution to Assignment Problem Three - 5
Mr. Joseph Martin The taxable benefit to be allocated to the president of the Company would be calculated as follows:
Standby Charge [(2/3)(12)($2,100)(7/12)]
Operating Cost Benefit [(23,000)($0.24)]

$ 9,800
5,520

Total Benefit

$15,320

As less than 50 percent of Mr. Martin’s kilometers were employment related, he cannot reduce the standby charge or use the alternative calculation of the operating cost benefit, based on one-half of the standby charge, even if it was more advantageous.
Mrs. Grace Martin The taxable benefit to be allocated to the marketing vice president would be calculated as follows:
Standby Charge [(2%)($78,000)(12)(2,000/20,004)]
Operating Cost Benefit - Lesser Of:
• [(2,000)($0.24)] = $480
• [(1/2)($1,872)] = $936

$1,872

Total Benefit

$2,352

480

zle hz As more than 50 percent of Mrs. Martin’s driving was employment related, there is a reduction in the standby charge to reflect her limited personal use of the vehicle. While Mrs. Martin would qualify for the alternative calculation of the operating cost benefit, it would produce a larger taxable benefit in this situation.
Mr. William Martin The taxable benefit to be allocated to the vice president of finance would be calculated as follows:
Standby Charge [(2/3)(12)($600)(12/12)]
Operating Cost Benefit [(32,000)($0.24)]
Reimbursement [(12)($300)]

$ 4,800
7,680
( 3,600)

Total Benefit

$ 8,880

d

As less than 50 percent of the kilometers are employment related, there is no reduction in the standby charge. In addition, the alternative calculation of the operating cost benefit cannot be used.
Mrs. Sharon Martin-Jones The taxable benefit that would be allocated to the industrial relations vice president would be calculated as follows:
Standby Charge [(2%)($39,000)(9)(9,500/15,003)]
Operating Cost Benefit - Lesser Of:
• [(9,500)($0.24)] = $2,280
• [(1/2)($4,445)] = $2,223

$4,445

Total Benefit

$6,668

2,223

As more than 50 percent of the use was employment related, there is a reduction in the standby charge. As the car was driven more than 50 percent for employment related purposes, Mrs. Martin-Jones can calculate the operating cost benefit as one-half of the standby charge which results in a lower benefit.

Canadian Tax Principles 2011/2012 - Solutions Manual

21

Solution To AP Three - 6

Solution to Assignment Problem Three - 6
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 Mr. Cheng with the financing required, assuming he is not a shareholder.
Cost Of Providing For Interest Payments On Commercial Loan
Mr. Cheng can borrow on a loan at a rate of interest of 4 percent. This means that the annual interest payments on $250,000 would amount to $10,000. As this interest will be deductible to Mr. Cheng , the after tax cost of this interest would be reduced to $5,600 [($10,000)(1 .44)].
In order to pay this interest, Mr. Cheng would require additional salary. Since Mr. Cheng is in the 44 percent tax bracket, he requires $10,000 [$5,600 ÷ (1 - .44)] of before tax salary to provide $5,600 in after tax funds. The cost to the Company of this alternative would be as follows: Gross Salary Increase [$5,600 ÷ (1 - .44)]
Reduction In Corporate Taxes (At 32 Percent)

(

zle hz Net Cost To Company - Additional Salary

$10,000
3,200)
$ 6,800

Cost Of Providing Interest Free Loan
Mr. Cheng would be assessed a taxable benefit on the loan of $7,500 [(3%)($250,000)] for the first year. However, under ITA 80.5, this would be deemed interest paid. As he is using the funds provided to produce 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 [(8%)($250,000)]
Corporate Taxes On Imputed Earnings (At 32 Percent)
Net Cost To Company - Loan

(

20,000
6,400)
$13,600

d

Conclusion
On the basis of the preceding analysis, it can be concluded that the Company should provide an additional $10,000 in salary rather than providing Mr. Cheng with an interest free loan of
$250,000. This alternative results in a net cost to the Company which is $6,800 ($13,600 $6,800) lower.

22

Canadian Tax Principles 2011/2012 - Solutions Manual

Solution To AP Three - 7

Solution to Assignment Problem Three - 7
Case A
The required information under the assumption that Borden Ltd. is a Canadian controlled private corporation is as follows:
·

Year Of Granting (2009) - No tax effect.

·

Year Of Exercise (2010) - No tax effect.

·

Year Of Sale (2011) - The tax effects would be as follows:
Employment Income [(2,500)($8.30 - $8.00)]
Taxable Capital Gain [(2,500)($8.55 - $8.30)(1/2)]
Increase In Net Income For Tax Purposes
Deduction Under ITA 110(1)(d) [(1/2)($750)]

$ 750.00
312.50
(

Increase In Taxable Income

$1,062.50
375.00)
$ 687.50

zle hz Case B
The required information under the assumption that Borden Ltd. is a Canadian public company is as follows:
·

Year Of Granting (2009) - No tax effect.

·

Year of Exercise (2010) - The results for this year would be as follows:
Employment Income [(2,500)($8.30 - $8.00)]
= Increase In Net Income For Tax Purposes
Deduction Under ITA 110(1)(d) [(1/2)($750)]
Increase In Taxable Income

$750.00
( 375.00)
$375.00

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.
·

Year Of Sale (2011) - The tax effects would be as follows:

d

Taxable Capital Gain [(2,500)($8.55 - $8.30)(1/2)]

$312.50

This $312.50 would be both the increase in Net Income For Tax Purposes and the increase in Taxable Income for the 2011 taxation year.

Canadian Tax Principles 2011/2012 - Solutions Manual

23

Solution To AP Three - 7
Case C
The required information under the assumption that Borden Ltd. is a Canadian public company is as follows:
·

Year Of Granting (2009) - No tax effect.

·

Year Of Exercise (2010) - As the option price was less than the fair market value of the shares at the time the options were issued, the ITA 110(1)(d) deduction from Taxable
Income is not available. The tax effects would be as follows:

·

Employment Income [(2,500)($8.30 - $8.00)]
And Increase In Net Income For Tax Purposes
Deduction Under ITA 110(1)(d)

$750.00
Nil

Increase In Net Income And Taxable Income

$750.00

Year Of Sale (2011) - The tax effects would be as follows:
Taxable Capital Gain [(2,500)($8.55 - $8.30)(1/2)]

$312.50

This $312.50 would be both the increase in Net Income For Tax Purposes and the increase in Taxable Income for the 2011 taxation year.

zle hz Case D
The required information under the assumption that Borden Ltd. is a Canadian controlled private corporation is as follows:
·

Year Of Granting And Year Of Exercise (2009) - No tax effect.

·

Year Of Sale (2011) - As the option price was less than the fair market value of the shares at the time the options were granted, no deduction is available under ITA 110(1)(d).
However, Ms. Balzac held the shares for two years after their acquisition and, as a consequence, she can claim a deduction against employment income under ITA 110(1)(d.1).
The tax effects would be as follows:
Employment Income [(2,500)($8.30 - $8.00)]
Taxable Capital Gain [(2,500)($8.55 - $8.30)(1/2)]

Increase In Taxable Income

24

d

Increase In Net Income For Tax Purposes
Deduction Under ITA 110(1)(d)
Deduction Under ITA 110(1)(d.1) [(1/2)($750)]

$ 750.00
312.50
$1,062.50
N/A
(
375.00)
$ 687.50

Canadian Tax Principles 2011/2012 - Solutions Manual

Solution To AP Three - 8

Solution to Assignment Problem Three - 8
As Mr. Segovia’s income includes commissions, he has a choice of deducting his expenses under a combination of ITA 8(1)(f), (i), and (j) or, alternatively under a combination of ITA
8(1)(h), (h.1), (i), and (j).
Deductions under ITA 8(1)(f) are limited to the amount of commissions earned. Alternatively, traveling costs and motor vehicle costs other than capital costs can be deducted under ITA
8(1)(h) and ITA 8(1)(h.1). Deductions under these provisions are not limited to commission income. As discussed in the text, he cannot use both ITA 8(1)(f) and the combination of ITA
8(1)(h) and (h.1).
As the deduction under ITA 8(1)(f) is limited by commission income, alternative calculations are required to determine the maximum deduction. These calculations are as follows:
ITA 8(1)(f)
(Limited to $18,500)
Professional Dues

Home Office Costs:
Utilities [(35%)($2,600)]
Maintenance [(35%)($1,450)]
Insurance [(35%)($1,250)]
Property Taxes [(35%)($4,800)]
Interest
CCA

Nil

$5,625

$5,625

Nil

Nil
Nil

Nil
Nil

1,688
5,738

Nil
Nil
438
1,680
Nil
Nil

Nil
Nil
Nil
Nil
Nil
Nil

910
508
Nil
Nil
Nil
Nil

Travel Costs
29,000
Non-Deductible Meals [(50%)($9,500)] ( 4,750)

Total

(

(

13,500
3,300)

(

5,100)

$37,093

$

450

29,000
4,750)

d

Golf Club Fees
Non-Deductible Membership Fees
Non-Deductible Entertainment
[(50%)($13,500 - $3,300)]

ITA 8(1)
(i) and (j)

Nil

zle hz Automobile Costs:
Operating Costs
[(45,000/60,000)($7,500)]
Financing Costs
[(45,000/60,000)($2,250)]
CCA [(45,000/60,000)($7,650)]

ITA 8(1)
(h) and (h.1)

Nil
Nil

Nil
Nil

Nil
Nil

Nil

Nil

$29,875

$9,294

The required calculation of minimum Net Employment Income would be as follows:
Salary
Commissions
Expenses (Note 1)
RPP Contributions (Note 2)
Awards (Note 3)
Stock Option Benefit (Note 4)
Net Employment Income

$252,000
18,500
( 39,169)
( 5,500)
650
11,000
$237,481

Note 1 The deduction of dues and other expenses under ITA 8(1)(i) and automobile capital costs (CCA and financing costs) under ITA 8(1)(j) is permitted without regard to other provisions used.

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25

Solution To AP Three - 8
The deduction for home office costs has been split between ITA 8(1)(i) and (f). Since the maintenance portion can be deducted under ITA 8(1)(i), it is not limited by the commission income. The insurance and property tax components are limited as they are deducted under ITA 8(1)(f). A limitation, which is not illustrated in this problem, prevents the deduction of home office costs from creating an employment loss.
As the ITA 8(1)(f) amount is limited to the $18,500 in commission income, the total deduction using ITA 8(1)(f), (i) and (j), is $27,794 ($18,500 + $9,294).
Using the combination of ITA 8(1)(h), (h.1), (i), and (j) produces a deduction of $39,169
($29,875 + $9,294). Note that when this approach is used, home office costs are limited to utilities and maintenance. Further, there is no deduction for entertainment costs.
However, this approach results in deductions totalling $11,375 ($39,169 - $27,794) more than the amount available using ITA 8(1)(f), (i), and (j) due to the effect of the commission income limit.
Note 2 The employer’s contributions to the RPP are not considered to be taxable benefit.

zle hz Note 3 An employee can receive any number of non-cash awards and, as long as the total is less than $500 for the year, there is no taxable benefit. In this case, Mr. Segovia receives non-cash awards of $750 ($300 + $450). The extra $250 ($750 - $500) will have to be included in income. In addition, he will have to include the gift certificate for $400 as it would be considered a near cash award. Note that he could also have received a long-service award of up to $500 on a tax free basis. However, it does not appear that such an award was given.
Note 4 There is an employment income inclusion on the exercise of the stock options of
$11,000 [(1,000)($31 - $20)].

d
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Canadian Tax Principles 2011/2012 - Solutions Manual

Solution To AP Three - 9

Solution to Assignment Problem Three - 9
Ms. Kline’s net employment income for the year would be calculated as follows:
Gross Salary
Registered Pension Plan Contributions
Contributions To Group Disability Plan (Note One)
Disability Insurance Benefit (Note One)
Automobile Benefit (Note Two)
Professional Dues
Stock Option Benefit [(200)($70 - $50)] (Note Three)

$73,500
2,400)
Nil
1,400
270
( 1,650)
4,000
(

Net Employment Income

$75,120

Note One The contributions to the group disability plan are not deductible, but can be applied against the $1,800 received under the plan during the year. The employer’s contributions to this plan are not a taxable benefit. The $1,800 in benefits received must be included in income as Ms. Kline’s employer has contributed to the plan. However, this benefit can be reduced by the $400 in total contributions that she has made in 2010 and
2011.

zle hz Note Two Based on the fact that Ms. Kline’s employment related usage is more than 50 percent of total usage, the automobile benefit is calculated as follows:
Standby Charge [(2/3)(12)($700 - $50)(11/12)(3,000/18,337)]
Operating Cost Benefit - Lesser Of:
• [(3,000)($0.24)] = $720
• [(1/2)($780)] = $390
Total Before Payments
Payments For Personal Use [(3,000)($0.30)]
Taxable Benefit

$

780
390

(

$1,170
900)
$ 270

As Ms. Kline’s employment related usage is more than 50 percent, she can elect to use one-half the standby charge as the operating cost benefit.

d

Note Three Although Ms. Kline would qualify for the deduction of one-half of the stock option benefit under ITA 110(1)(d), it is a deduction from Taxable Income and would not affect the calculation of the required figure in this problem, net employment income.

Canadian Tax Principles 2011/2012 - Solutions Manual

27

Solution To AP Three - 10

Solution to Assignment Problem Three - 10
Mr. Brooks’ net employment income would be calculated as follows:
Gross Salary
Additions:
Bonus (Amount Received Only)
Disability Insurance Receipts (Note One)
Personal Benefit On Car (Note Two)
Stock Option Benefit [($28 - $23)(200)] (Note Three)
Home Relocation Loan Benefit (Note Four)

$53,000
$6,500
4,200
1,034
1,000
625

13,359
$66,359

Deductions:
RPP Contributions
Union Dues

($2,800)
(
240)

Net Employment Income

(

3,040)
$63,319

Note One As all of the premiums were paid by the employer and were not considered to be a taxable benefit, benefits received under this coverage must be included in employment income.

zle hz Note Two The personal benefit on the company car, taking into consideration the two months he was in the hospital and unable to make use of the car, would be as follows:
Standby Charge [(2/3)(12)($678)(10/12)(5,000/16,670)]
Operating Cost Benefit - Lesser Of:
• [(5,000)($0.24)] = $1,200
• [(1/2)($1,356)] = $678
Less: Payments Withheld By Employer
Taxable Benefit

$1,356
678
( 1,000)
$1,034

Note Three Although Mr. Brooks would qualify for the deduction of one-half of the stock option benefit under ITA 110(1)(d), it is a deduction from Taxable Income and would not affect the calculation of net employment income.
Note Four The taxable benefit associated with the home relocation loan would be calculated as follows:

d

[($125,000)(2% - Nil)(3/12)] = $625

There is a deduction available equal to the benefit associated with an interest free home relocation loan of up to $25,000. However, the deduction is applied in the calculation of
Taxable Income. As a result, the usual ITA 80.4(1) imputed interest benefit is included in net employment income, a figure that is not changed by the deduction.
Other items and the reasons for their exclusion would be as follows:
·
·
·
·

·
·

28

Any income tax withheld cannot be deducted in the calculation of employment income.
The CPP and EI payments are eligible for a credit against taxes payable, but cannot be deducted in the calculation of employment income.
The donations to the United Way are eligible for a credit against taxes payable, but cannot be deducted in the calculation of employment income.
The accounting course fee reimbursement is not a taxable benefit as it can be assumed that the course was not taken as a personal interest course. The music course has not effect on employment income.
Fees paid to a financial planner are not deductible from employment income.
Payment of premiums on life insurance are not deducted in the calculation of employment income.

Canadian Tax Principles 2011/2012 - Solutions Manual

Solution To AP Three - 11

Solution to Assignment Problem Three - 11
Part A
The calculations for Net Employment Income would be as follows:
Offer One

Offer Two

Salary
Commissions
Hotel, Meal, And Airline Allowance (Note One)
Hotel, Meal, And Airline Reimbursement (Note Two)
Automobile Benefit (Note Three)
Automobile Allowance [(12)($1,500)]
Automobile Costs [(37,000/53,000)($21,400)]
Loan Benefit [(2%)($200,000)]
Disability Insurance Benefit (Note Four)
Life Insurance Benefits (Note Four)
Advertising Expense (Note Five)

$225,000
Nil
Nil
N/A
7,439
N/A
N/A
4,000
Nil
3,800
Nil

$175,000
85,000
N/A
Nil
N/A
18,000
( 14,940)
N/A
Nil
3,800
( 23,000)

Net Employment Income

$240,239

$243,860

zle hz Note One The $30,000 per year allowance is considered reasonable and, as a consequence, it does not have to be included in income. In addition, it exceeds the actual costs of $26,500 ($18,000 + $8,500). This means it would not be good tax planning to include the allowance and deduct the actual costs.
Note Two Reimbursements have no effect on employment income. They are neither deducted nor included in the determination of Net Employment Income.
Note Three The taxable benefit associated with the automobile provided under Offer
One would be calculated as follows:
Standby Charge [(2/3)(12)($850 - $75)(12/12)(16,000 ÷ 20,004)]
Operating Cost Benefit - Lesser Of:
• [(16,000)($0.24)] = $3,840
• [(1/2)($4,959)] = $2,480

$4,959

Total Benefit

$7,439

2,480

d

Note Four The payment of disability insurance premiums by an employer does not create a taxable benefit for employees. However, the payment of life insurance premiums does create a taxable benefit.
Note Five As Ms. Arden does not receive any commissions under Offer One, she cannot deduct her advertising costs. She can deduct the full amount under Offer Two as the
$23,000 total is less than her commissions of $85,000.

Part B
The actual amount of annual cash to be received from the employer under the two offers would be calculated as follows:
Offer One

Offer Two

Salary
Commissions
Hotel, Meal, And Airline Allowance
Reimbursements
Automobile Allowance

$225,000
Nil
30,000
N/A
N/A

$175,000
85,000
N/A
26,500
18,000

Total Cash

$255,000

$304,500

Canadian Tax Principles 2011/2012 - Solutions Manual

29

Solution To AP Three - 11
The fact that Offer Two has significantly higher cash flows and a slightly higher Taxable Income suggests that Offer Two is preferable. A major factor in this result is that the absence of commissions in Offer One results in the $23,000 in advertising and promotion expenses not being deductible. This could easily be fixed at no cost to the employer by having an appropriate amount of the $30,000 allowance treated as a reimbursement of advertising and promotion expenses. This would leave the unreimbursed hotel, meal, and airline costs which could be deducted by Ms. Arden without the presence of commission income.
In addition, three other factors have not been considered in this simple analysis:
·

Offer One includes the provision of an automobile while Offer Two does not. This means that, under Offer One, Ms. Arden could get rid of her personal automobile, resulting in a significant annual savings.

·

Offer One includes an interest free loan that will be invested. The fact that these funds will be invested means that there will be a deduction available to offset the $4,000 benefit on the interest free loan. In addition, Ms. Arden’s cash flows are likely to be improved by some amount of return on the investment of the $200,000 in loan proceeds.

·

Offer Two contains an estimate of commissions. Unlike the fixed salary provided in Offer
One, there is uncertainty with respect to the amount of these commissions. They could be higher or lower than estimated. There could also be uncertainty related to the timing of the payment of the commissions.

zle hz Given these latter considerations, it is difficult to come to a firm conclusion on the two offers.
If the invested funds earn a substantial return, she may be better off with Offer One. Correspondingly, it is difficult to quantify the cash flows associated with not owning a personal automobile. In addition, there could be a disadvantage with Offer Two if commission income did not reach the predicted level of $85,000.

d
30

Canadian Tax Principles 2011/2012 - Solutions Manual

Solution To AP Three - 12

Solution to Assignment Problem Three - 12
Matilda Bracken’s net employment income would be calculated as follows:
Item
Item
Item
Item
Item
Item
Item
Item
Item
Item
Item
Item
Item
Item
Item
Item

1 - Signing Bonus (Note 1)
2 - Salary Received (Note 2)
2 - RPP Contributions
5 - Bonus Received Note 2)
6 - Excess Gift (Note 3)
7 - Financial Counseling (Note 4)
8 - Housing Loss Reimbursement (Note 5)
9 - Stock Option Benefit (Note 6)
10 - CFP Dues Paid
10 - Employer Reimbursement Of CFP Dues
12 - Imputed Interest On Housing Loan (Note 7)
13 - Home Office Allowance (Note 8)
14 - Automobile Benefit (Note 9)
15 - Stationery And Supplies
15 - Long Distance Calls
15 - Home Office (Note 10)

Net Employment Income

$ 12,000
120,125
(
3,700)
5,300
150
1,200
17,500
400
(
1,600)
800
735
2,600
8,507
(
147)
(
110)
(
1,910)
$161,850

zle hz Note 1 Amounts received prior to, during or after employment are required to be included in employment income when received.
Note 2 Salary and other forms of remuneration such as bonuses are included in income when received regardless of when earned.
Note 3 Non-cash gifts of up to $500 can be received by an employee on a tax free basis. Amounts in excess of $500 are taxable. The excess $150 ($650 - $500) will be included in Matilda’s net employment income.
Note 4 The provision by an employer of financial counseling services is considered to be a taxable benefit.

d

Note 5 Employer-reimbursed housing losses fall into two categories – regular housing losses and eligible housing losses. Eligible housing losses occur when there is an eligible relocation which generally means a relocation or move the expenses of which would qualify for a moving expense deduction had they been paid by the employee. In this case the move is an eligible relocation meaning that the reimbursement qualifies as an eligible housing loss. The employer reimbursed $50,000
[(50%)($100,000)]. The taxable portion of the loss reimbursement is $17,500
[(1/2)($50,000 - $15,000)]. The remaining $32,500 ($50,000 - $17,500) is received tax free.
Note 6 The fair market value of the shares acquired by Matilda on December 1,
2011 was $8,000 [($7,200)(1 - .10)]. The stock option benefit on all of the shares and the shares that were sold can be calculated as follows:
Shares
Acquired (200)

Shares
Sold (100)

$8,000
( 7,200)

$4,000
( 3,600)

$ 800

$ 400

Fair Market Value
Amount Paid
Stock Option Benefit

Because RPL is a CCPC, the employment income inclusion resulting from the exercise of options can be deferred until the shares are sold. This means that only the $400 amount would be included in Matilda’s 2011 net employment income. There would also be a capital gain of $100 ($4,100 - $4,000) on the sale. However, this is not part
Canadian Tax Principles 2011/2012 - Solutions Manual

31

Solution To AP Three - 12 of employment income.
Note 7 The imputed interest on this loan would $735 [($220,000)(2%)(61 ÷ 365)].
Note that, because this appears to be a home relocation loan, a deduction would be available in the determination of Taxable Income. However, this would have no effect on the required net employment income calculation.
Note 8 Allowances received are included in employment income unless the allowance is specifically excluded by ITA 6(1)(b). There is no exclusion for this allowance.
The amount is $2,600 [(8)($325)].
Note 9

The automobile benefit would be calculated as follows:

Standby Charge [(2%)(8)($45,200)(12,000 ÷ 13,336)]
Operating Cost Benefit - Lesser Of:
[($0.24)(12,000)] = $2,880
[(1/2)($6,507) = $3,254
Total Benefit
Reimbursement To Employer [(8)($110)]
Net Benefit

$6,507
2,880
$9,387
(
880)
$8,507

zle hz Note 10 Based on floor space, the home office occupies 12 percent of the apartment [150 ÷ 1,250]. The home office expenses that may be claimed for the period
June 1 to November 30 are the following:
Rent Paid [(7)($2,200)]
Electricity Paid
Paint

$15,400
350
165

Total Eligible Expenses
Home Office Use

$15,915
12%

Deductible Expense

$ 1,910

Comments On Excluded Items

Item 2 - Income taxes, CPP and EI withheld - These amounts are not deductible.
The CPP and EI are eligible for a non-refundable tax credit that will reduce taxes payable. ·

Item 3 - Employer contributions to an RPP do not result in a taxable benefit at the time of contribution.

·

Item 4 - Group medical plans are generally referred to as Private Health Insurance
Plans. Premiums paid by employers are specifically excluded from benefit taxation.

·

Item 11 - Fees to recreational clubs where the primary advantage is to the employer are not considered taxable benefits to the employee.

·

Item 15 - Home Office and other expenses:
· No deduction may be claimed for the furniture and the computer by employees
· Monthly phone charges are not deductible
· Property insurance can only be claimed by employees earning commissions

d

32

·

Canadian Tax Principles 2011/2012 - Solutions Manual

Solution To AP Four - 1

CHAPTER FOUR SOLUTIONS
Solution to Assignment Problem 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
Spousal ($10,527 - $7,250)
Child [(3)($2,131)]
EI (Maximum)
CPP (Maximum)
Canada Employment

$10,527
3,277
6,393
787
2,218
1,065

Total Credit Base
Rate

$24,267
15%

Total Credits

$ 3,640

2. Ms. Barkin will qualify for the following credits:

zle hz Basic Personal Amount
Eligible Dependant (9 or 12 Year Old)
Child [(3)($2,131)]

$10,527
10,527
6,393

Total Credit Base
Rate

$27,447
15%

Total Credits

$ 4,117

3. Mr. Appleton will qualify for the following credits:

$10,527
4,877
2,131
4,282

Total Credit Base
Rate

$21,817
15%

Total Credits

d

Basic Personal Amount
Spousal ($10,527 - $5,650)
Child (Daughter)
Caregiver (22 Year Old Disabled Son)*

$ 3,273

*The 22 year old disabled child qualifies for both the caregiver and infirm dependant over 17 credits. In such situations, ITA 118(4)(d) deems the individual not to be a dependant. This, in effect, requires the use of the caregiver credit.
4. Ms. Pale will qualify for the following tax credits:
Basic Personal Amount
Spousal ($10,527 - $4,840)
Age [$6,537 - (15%)($52,500 - $32,961)]

$10,527
5,687
3,606

Total Credit Base
Rate

$19,820
15%

Total Credits

$ 2,973

Because her income is below the income threshold, there will be no clawback of Ms.
Pale’s OAS receipts.

Canadian Tax Principles 2011/2012 - Solutions Manual

33

Solution To AP Four - 1
5. Mr. Land will qualify for the following tax credits:
Basic Personal Amount
Spousal
Child [(2)($2,131)]
Medical Expenses (See Note)

Note

($10,527)
( 10,527)
( 4,262)
( 12,051)

Total Credit Base
Rate

$37,367
15%

Total Credits

$ 5,605

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)
Lesser Of:
• [[(3%)($126,420)] = $3,793
• 2011 Threshold Amount = $2,052

( 2,052)

$4,560
(

zle hz 19 Year Old’s Medical Expenses
Reduced By The Lesser Of:
• 2011 Threshold Amount = $2,052
• [(3%)($7,240)] = $217

$9,760

217)

Total Medical Expense Claim

4,343
$12,051

Prior to 2011, medical expenses claimed for an adult dependant were limited to an absolute amount of $10,000. The March 22, 2011 budget proposes the elimination of this constraint.

d
34

Canadian Tax Principles 2011/2012 - Solutions Manual

Solution To AP Four - 2

Solution to Assignment Problem Four - 2
Case A
The solution to this Case can be completed as follows:
Tax On First $41,544
Tax On Next $36,456 ($78,000 - $41,544) At 22 Percent

$6,232
8,020

Tax Before Credits
Basic Personal Amount
Eligible Dependant
Child
Tuition
Education [(10)($120)]
Textbook [(10)($20)]

($10,527)
( 10,527)
( 2,131)
( 5,640)
( 1,200)
(
200)

$14,252

Credit Base
Rate

($30,225)
15%

(

Federal Tax Payable

4,534)
$ 9,718

zle hz Case B
The solution to this Case can be completed as follows:

Tax On First $41,544
Tax On Next $36,456 ($78,000 - $41,544) At 22 Percent

$6,232
8,020

Tax Before Credits
Basic Personal Amount
EI
CPP
Canada Employment

($10,527)
(
787)
( 2,218)
( 1,065)

$14,252

Credit Base
Rate

($14,597)
15%

Charitable Donations (See Note)
Federal Tax Payable

(

2,190)

( 10,122)
$ 1,940

d

Note With a Net Income For Tax Purposes of $78,000, Ms. Sykes’ maximum claim for charitable donations is $58,500 [(75%)($78,000)]. However, if this amount was claimed, the resulting credit would exceed her 2011 Tax Payable.
By claiming $35,000, her credit will be $10,122 [(15%)($200) + (29%)($35,000 - $200)].
The unused donation of $115,000 ($150,000 - $35,000) can be carried forward for up to five years.

Canadian Tax Principles 2011/2012 - Solutions Manual

35

Solution To AP Four - 2
Case C
The solution to this Case can be completed as follows:
Tax On First $41,544
Tax On Next $36,456 ($78,000 - $41,544) At 22 Percent

$6,232
8,020

Tax Before Credits
Basic Personal Amount
Spousal ($10,527 - $7,600)
Child
Transfer Of Disability
Transfer Of Disability Supplement
Caregiver [$4,282 - ($17,600 - $14,624)]

($10,527)
( 2,927)
( 2,131)
( 7,341)
( 4,282)
( 1,306)

$14,252

Credit Base
Rate

($28,514)
15%

( 4,277)

Federal Tax Payable

$ 9,975

Ms. Sykes would claim the caregiver credit for Harry since Buff would have no Tax Payable.

zle hz Case D
The solution to this Case can be completed as follows:

Tax On First $41,544
Tax On Next $36,456 ($78,000 - $41,544) At 22 Percent

$6,232
8,020

Tax Before Credits
Basic Personal Amount
Spousal ($10,527 - $2,540)
Child
EI
CPP
Canada Employment
Medical Expenses (See Note)

($10,527)
( 7,987)
( 2,131)
(
787)
( 2,218)
( 1,065)
( 8,499)

Credit Base
Rate

($33,214)
15%

Note

d

Federal Tax Payable

$14,252

(

4,982)
$ 9,270

The claim for medical expenses is determined as follows:

Wanda And Buff ($2,100 + $360)
Janice
Lesser Of:
• [(3%)($78,000)] = $2,340
• 2011 Threshold Amount = $2,052
Mark’s Medical Expenses
Reduced By The Lesser Of:
• [(3%)($2,460)] = $74
• 2011 Threshold Amount = $2,052
Total Medical Expense Claim

$2,460
3,645
( 2,052)

$4,520
(

74)

4,446
$8,499

Prior to 2011, medical expenses claimed for an adult dependant were limited to an absolute amount of $10,000. The March 22, 2011 budget proposes the elimination of this constraint.

36

Canadian Tax Principles 2011/2012 - Solutions Manual

Solution To AP Four - 2
Case E
The solution to this Case can be completed as follows:
Tax On First $41,544
Tax On Next $36,456 ($78,000 - $41,544) At 22 Percent

$6,232
8,020

Tax Before Credits
Basic Personal Amount
Spousal ($10,527 - $9,600)
Children [(2)($2,131)]
EI
CPP
Canada Employment
Transfer Of Buff’s Disability Amount
Transfer Of Buff’s Age Amount
Transfer Of Buff’s Pension Amount
Transfer Of Education Related Amounts (See Note)

($10,527)
(
927)
( 4,262)
(
787)
( 2,218)
( 1,065)
( 7,341)
( 6,537)
( 2,000)
( 5,000)

$14,252

Credit Base
Rate

($40,664)
15%

Federal Tax Payable

$ 8,152

zle hz Note

( 6,100)

Buff’s education related amounts are calculated as follows:
Tuition
Education [(8)($400)]
Textbook [(8)(65)]

$ 8,450
3,200
520

Total

$12,170

While Buff has $12,170 in education related amounts available and cannot make any use of them in determining his 2011 Tax Payable, the transfer is limited to $5,000. The unused amount of $7,170 ($12,170 - $5,000) can be carried forward indefinitely, but can only be claimed by Buff.

d
Canadian Tax Principles 2011/2012 - Solutions Manual

37

Solution To AP Four - 3

Solution to Assignment Problem Four - 3
Case A
The solution to this Case can be completed as follows:
Tax On First $41,544
Tax On Next $9,456 ($51,000 - $41,544) At 22 Percent

$6,232
2,080

Tax Before Credits
Basic Personal Amount
Spousal ($10,527 - $8,800)
EI
CPP
Canada Employment
Caregiver [$4,282 - ($16,000 - $14,624)]

($10,527)
( 1,727)
(
787)
( 2,218)
( 1,065)
( 2,906)

$8,312

Credit Base
Rate

($19,230)
15%

( 2,885)

Federal Tax Payable

$5,427

zle hz Mr. Norris would claim the caregiver credit for Bernice since Susan would have no Tax
Payable.

Case B
The solution to this Case can be completed as follows:

Tax On First $41,544
Tax On Next $9,456 ($51,000 - $41,544) At 22 Percent

Credit Base
Rate
Federal Tax Payable

38

$8,312
($10,527)
( 6,117)
( 2,131)
(
787)
( 2,218)
( 1,065)

$3,150

d

Tax Before Credits
Basic Personal Amount
Spousal ($10,527 - $4,410)
Child
EI
CPP
Canada Employment
Medical Expenses
Reduced By The Lesser Of:
• [(3%)($51,000)] = $1,530
• 2011 Threshold Amount = $2,052

$6,232
2,080

( 1,530)

(

1,620)

($24,465)
15%

(

3,670)
$ 4,642

Canadian Tax Principles 2011/2012 - Solutions Manual

Solution To AP Four - 3
Case C
The solution to this Case can be completed as follows:
Tax On First $41,544
Tax On Next $9,456 ($51,000 - $41,544) At 22 Percent

$6,232
2,080

Tax Before Credits
Basic Personal Amount
Spousal ($10,527 - $4,500)
EI
CPP
Canada Employment
Transfer From Son (Note)

($10,527)
( 6,027)
(
787)
( 2,218)
( 1,065)
( 5,000)

$8,312

Credit Base
Rate

($25,624)
15%

Federal Tax Payable

( 3,844)
$4,468

Note: The transfer from the son is as follows:
$4,000
3,200
520

zle hz Tuition Fees
Base For Education Credit [(8 Months)($400)]
Base For Textbook Credit [(8 Months)($65)]
Total Amount Available
Maximum Transfer

$7,720
( 5,000)

Carry Forward (For Allen’s Use Only)

$2,720

Allen’s Tax Payable is completely eliminated by his basic personal credit. He can transfer a maximum of $5,000 of his education, tuition and textbook amounts to his father. The remaining $2,720 can be carried forward indefinitely, but must be used by Allen.

Case D
The solution to this Case can be completed as follows:

Tax On First $41,544
Tax On Next $9,456 ($51,000 - $41,544) At 22 Percent

d

Tax Before Credits
Basic Personal Amount
EI
CPP
Canada Employment

$6,232
2,080

Credit Base
($14,597)
Rate
15%
Political Contributions Tax Credit
[(3/4)($400) + (1/2)($350) + (1/3)($250)]
Charitable Donations [(15%)($200) + (29%)($15,000 - $200)]
Federal Tax Payable

$8,312

($10,527)
(
787)
( 2,218)
( 1,065)
( 2,190)
(
558)
( 4,322)
$ 1,242

Unused charitable donations can be carried forward for up to five years. The limitation of
75 percent of Net Income For Tax Purposes would have given Mr. Norris a maximum credit based on $38,250 [(75%)($51,000)] in charitable donations. However, he chose to claim
$15,000. Since the charitable donations tax credit is non-refundable, he should not claim anything close to his maximum in this year.

Canadian Tax Principles 2011/2012 - Solutions Manual

39

Solution To AP Four - 3
This leaves Mr. Norris with $35,000 ($50,000 - $15,000) in charitable donations that can be carried forward for five years until 2016. He will be subject to the 75 percent limitation of Net Income For Tax Purposes in any year he claims the charitable donations.

Case E
The solution to this Case can be completed as follows:
Tax On First $41,544
Tax On Next $9,456 ($51,000 - $41,544) At 22 Percent

$6,232
2,080

Tax Before Credits
Basic Personal Amount
Eligible Dependant
Child - Mary
EI
CPP
Canada Employment
Interest On Student Loan

($10,527)
( 10,527)
( 2,131)
(
787)
( 2,218)
( 1,065)
(
450)

$8,312

Credit Base
Rate

($27,705)
15%

( 4,156)
$4,156

d

zle hz Federal Tax Payable

40

Canadian Tax Principles 2011/2012 - Solutions Manual

Solution To AP Four - 4

Solution to Assignment Problem Four - 4
Mr. Brooks’ net employment income would be calculated as follows:
Gross Salary
Additions:
Bonus (Amount Received Only)
Disability Insurance Receipts (Note One)
Personal Benefit On Car (Note Two)
Stock Option Benefit [($28 - $23)(200)] (Note Three)
Home Relocation Loan Benefit (Note Four)

$53,000
$6,500
4,200
1,034
1,000
625

13,359
$66,359

Deductions:
RPP Contributions
Union Dues

($2,800)
(
240)

(

Net Employment Income

3,040)
$63,319

Note One As all of the premiums were paid by the employer and were not considered to be a taxable benefit, benefits received under this coverage must be included in employment income.

zle hz Note Two The personal benefit on the company car, taking into consideration the two months he was in the hospital and unable to make use of the car, would be as follows:
Standby Charge [(2/3)(12)($678)(10/12)(5,000/16,670)]
Operating Cost Benefit - Lesser Of:
• [(5,000)($0.24)] = $1,200
• [(1/2)($1,356)] = $678
Less: Payments Withheld By Employer

$1,356
678
( 1,000)

Taxable Benefit

$1,034

Note Three Although Mr. Brooks would qualify for the deduction of one-half of the stock option benefit under ITA 110(1)(d), it is a deduction from Taxable Income and would not affect the calculation of net employment income.

[($125,000)(2% - Nil)(3/12)] = $625

d

Note Four The taxable benefit associated with the home relocation loan would be calculated as follows:

Taxable Income
Mr. Brooks’ Taxable Income would be calculated as follows:

Net Income For Tax Purposes (Net Employment Income)
Stock Option Deduction [(1/2)($1,000)]
Home Relocation Loan Benefit - Lesser of:
• Benefit Included In Income = $625
• Maximum [($25,000)(2%)(3/12)] = $125
Taxable Income

Canadian Tax Principles 2011/2012 - Solutions Manual

(

$63,319
500)

(

125)
$62,694

41

Solution To AP Four - 4
Tax Payable
Mr. Brooks’ federal Tax Payable (Refund) would be calculated as follows:
Tax On First $41,544
Tax On Next $21,150 ($62,694 - $41,544) At 22 Percent

$ 6,232
4,653

Federal Tax Before Credits
Basic Personal Amount
Eligible Dependant (Harold)
Child
Transfer - Harold’s Disability
Disability Supplement
Caregiver (Note Five)
EI Premiums
CPP Contributions
Canada Employment
Public Transit Passes (Note Six)
Medical Expenses (Note Seven)
Tuition Fee - Unreimbursed Music Course (Note Eight)
First Time Home Buyer’s

($10,527)
( 10,527)
( 2,131)
( 7,341)
( 4,282)
( 4,282)
(
787)
( 2,218)
( 1,065)
(
860)
( 10,890)
(
600)
( 5,000)

$10,885

Credit Base
Rate

($60,510)
15%

9,077)

Charitable Donations [(15%)($200) + (29%)($480 - $200)]

(

111)

Net Federal Tax
Federal Income Tax Withheld

(

$ 1,697
3,000)

Federal Tax Payable (Refund)

($ 1,303)

zle hz (

Note Five Mr. Brooks is eligible for the caregiver credit for his mother as she is over 64 years of age and her income is below the threshold for the caregiver credit. This means that Mr.
Brooks can claim the full amount of the caregiver credit.
Note Six Mr. Brooks cannot claim the cost of the transit passes for his mother. As a result, the base for the public transit pass credit is $860 [(10)($26 + $60)].
Note Seven Allowable medical expenses are as follows:

d

Mr. Brooks’ And Minor Child (Harold) Medical Expenses
($7,300+ $4,450)
Lesser Of:
• [(3%)($63,319)] = $1,900
• 2011 Threshold Amount = $2,052
Grace’s Medical Expenses
Reduced By The Lesser Of:
• $2,052
• [(3%)($7,500)] = $225
Allowable Medical Expenses

$11,750
( 1,900)

$1,265
(

225)

1,040
$10,890

Prior to 2011, medical expenses claimed for an adult dependant were limited to an absolute amount of $10,000. The March 22, 2011 budget proposes the elimination of this constraint.
Note Eight Since the music course was less than three consecutive weeks in duration, Mr.
Brooks cannot claim the education or textbook credit for that course. As the accounting course tuition fees were reimbursed by his employer, no education or textbook credits are available for that course either.

42

Canadian Tax Principles 2011/2012 - Solutions Manual

Solution To AP Four - 5

Solution to Assignment Problem Four - 5
Part A
Ms. Dalvi’s minimum Net Income For Tax Purposes would be calculated as follows:
Salary
Additions:
Bonus [(2/3)($34,500)]
Automobile Benefit (Note 1)
Client Meals And Entertainment (Note 2)
Interest Free Loan Benefit (Note 3)
Gifts (Note 4)
Stock Options (Note 5)
Deductions:
RPP Contributions
Professional Association Dues

$143,000
23,000
6,101
Nil
1,250
1,100
9,600
(
(

Net Income For Tax Purposes

Note 1

6,400)
1,200)
$176,451

The automobile benefit would be calculated as follows:
$4,067

Total Benefits

$6,101

zle hz Standby Charge [(2/3)(12)($728 - $50)(11/12)(15,000 ÷ 18,337)]
Operating Cost Benefit - Lesser Of:
• [(1/2)($4,067)] = $2,034
• [($0.24)(15,000)] = $3,600

2,034

As Ms. Dalvi’s employment related use was more than 50 percent, the reduced standby charge is available. In addition, she can use the alternative calculation of the operating cost benefit.
Note 2 Ms. Dalvi’s meal and entertainment costs exceed her employer’s reimbursement by $5,300 ($14,800 - $9,500). However, as she has no commission income, she cannot deduct these out-of-pocket costs.
Note 3

The taxable benefit on the loan is calculated as follows:

d

[(1%)($250,000)(6/12)] = $1,250

Note 4 The gift certificate for $400 is taxable because it is a near-cash gift. The first
$500 of the long-service award will not be a taxable benefit. However, the excess of
$700 ($1,200 - $500) will be a taxable benefit. As the value of the Christmas gift basket is under $500, it will not create a taxable benefit. The total taxable benefit is
$1,100 ($400 + $700).
Note 5

The stock option benefit would be calculated as follows:
[(1,200)($45 - $37)] = $9,600

Note that, because the option price was less than the fair market value of the shares at the time the options were granted, no ITA 110(1)(d) deduction is available in the determination of Taxable Income (Part B).

Part B
Ms. Dalvi’s Taxable Income would be equal to her Net Income For Tax Purposes as there is no stock option deduction available.

Canadian Tax Principles 2011/2012 - Solutions Manual

43

Solution To AP Four - 5
Part C
Based on the Taxable Income calculated in Part B, Ms. Dalvi’s Tax Payable would be calculated as follows:
Tax On First $128,800
Tax On Next $47,651 ($176,451 - $128,800) At 29 Percent

$ 27,256
13,819

Tax Before Credits

$41,075
($10,527)
( 3,327)
( 4,282)
( 2,131)
(
787)
( 2,218)
( 1,065)
( 6,537)
( 7,341)
( 5,000)
( 5,000)
(
750)
( 19,604)

zle hz Credits:
Basic Personal Amount
Spousal ($10,527 - $7,200)
Caregiver - Mary (Note 6)
Child - Martha
EI Premiums
CPP Contributions
Canada Employment
Spouse’s Age
Spouse’s Disability
First Time Home Buyers (Maximum)
Transfer Of Mark’s Education
Related Credits (Note 7)
Transit Passes [($75)(1)(10)] (Note 8)
Medical Expenses (Note 9)
Credit Base
Rate

($68,569)
15%

Charitable Donations (Note 10)
Federal Tax Payable
Federal Tax Withheld

Amount Owing (Refund)

( 10,285)
(

1,132)
$29,658
( 29,000)
$

658

Note 6 Mary is eligible for both the infirm dependent over 17 and the caregiver tax credits. In these circumstances, ITA 118(4)(d) indicates that, when an individual is eligible for the caregiver tax credit, they are deemed not to be a dependant. This, in effect, requires the use of the caregiver credit only.
Note 7

Mark’s total education related amounts are calculated as follows:

Total

d

Tuition
Education [(10)($400)]
Textbook [(10)($65)]

$ 9,400
4,000
650
$14,050

As Mark has no income of his own, he cannot use any of these amounts. However, the transfer to his mother is limited to $5,000, leaving him with a carry forward to subsequent years of $9,050 ($14,050 - $5,000).
Note 8 The transit pass credit can only be claimed for children who have not attained the age of 19 during the year. Ms. Dalvi cannot claim Mark’s transit passes.
Note 9 The base for Ms. Dalvi’s medical expense credit can be calculated as follows: 44

Canadian Tax Principles 2011/2012 - Solutions Manual

Solution To AP Four - 5
Ms. Dalvi, Her Spouse And Minor Child
($6,200 + $1,800)
Lesser Of:
• [(3%)($176,451)] = $5,294
• 2011 Threshold Amount = $2,052
Mary’s Medical Expenses
Reduced By The Lesser Of:
• $2,052
• [(3%)($4,800)] = $144

$ 8,000
( 2,052)
$11,300
(

Mark’s Medical Expenses
Reduced By The Lesser Of:
• $2,052
• [(3%)(Nil)] = Nil

144)

11,156

$2,500
(

Nil)

Allowable Medical Costs

2,500
$19,604

Prior to 2010, the claim for an adult dependant’s medical expenses was limited to an absolute amount of $10,000. The March 22, 2011 federal budget proposes the elimination of this constraint.

zle hz Note 10
$200)].

The donations credit is equal to $1,132 [(15%)($200) + (29%)($4,000 -

d
Canadian Tax Principles 2011/2012 - Solutions Manual

45

Solution To AP Four - 6

Solution to Assignment Problem Four - 6
Part A
Mr. Bosworth’s minimum Net Income For Tax Purposes would be calculated as follows:
Salary
$180,000
Additions:
Commissions
11,500
Bonus (Note 1)
Nil
Life Insurance Premiums (Employer’s Contribution)
460
Automobile Benefit (Note 2)
6,800
Gift ($2,500, Less $500 Limit On Gifts)
2,000
Stock Option Benefit (Note 3)
13,000
Deductions:
RPP Contributions
(
5,200)
Employment Expenses (Note 4)
( 20,371)
Net Income For Tax Purposes

$188,189

zle hz Note 1 As all of the bonus is being paid in 2012, none of it will be included in Mr.
Bosworth’s 2011 Net Income For Tax Purposes.
Note 2

The standby charge would be calculated as follows:
[(2/3)(12)($925 - $75)(20,004 ÷ 20,004)] = $6,800

As Mr. Bosworth’s personal milage exceeds 20,004 kilometers, there is no reduction in the standby charge. There would be no operating cost benefit as Mr. Bosworth paid for all of the operating costs.
Note 3 The total employment income inclusion would be $13,000 [(5,000)($12.35
- $9.75)]. As the option price was equal to the market price at the time the options were issued, $6,500 [(1/2)($13,000)] can be deducted in the determination of
Taxable Income.
Note 4

Potentially deductible expenses are as follows:
$ 6,811
3,210
10,350

Subtotal for ITA 8(1)(h) and (h.1)
Advertising
Entertainment [(50%)($6,500)]

$20,371
12,400
3,250

Total for ITA 8(1)(f) - Limited To Commissions

$36,021

d

Car Operating Costs [(41,000 ÷ 62,000)($10,300)]
Meals [(50%)($6,420)]
Hotels

All of these costs can be deducted under ITA 8(1)(f). However, the total deduction is limited to commission income which, for 2011, is only $11,500. Alternatively, the car operating costs, meals, and hotels, can be deducted under ITA 8(1)(h) and (h.1). As shown in the preceding table, this total would be $20,371. 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 under the latter provisions.

46

Canadian Tax Principles 2011/2012 - Solutions Manual

Solution To AP Four - 6
Part B
Mr. Bosworth’s minimum Taxable Income would be calculated as follows:
Net Income For Tax Purposes
Stock Option Deduction [(1/2)($13,000)]

$188,189
( 6,500)

Taxable Income

$181,689

Part C
Based on the Taxable Income calculated in Part B, Mr. Bosworth’s federal Tax Payable would be calculated as follows:
Tax On First $128,800
Tax On Next $52,889 ($181,689 - $128,800) At 29 Percent

$27,256
15,338

Tax Before Credits

$42,594

Credits:
Basic Personal Amount
Spouse ($10,527 - $6,450)
Child (Daughter)
Transfer Of Daughter’s Disability
Transfer Of Disability Supplement
EI Premiums
CPP Contributions
Canada Employment
Child Fitness ($400 + $500) (Note 5)
Tuition - Andrew
Education - Andrew [(4)($120)]
Textbook - Andrew [(4)($20)]
Transfer Of Son’s Education Credits
(Note 6)
Medical Expenses (Note 7)

( 3,077)
( 14,614)

Credit Base
Rate

($53,249)
15%

zle hz ($10,527)
( 4,077)
( 2,131)
( 7,341)
( 4,282)
(
787)
( 2,218)
( 1,065)
(
900)
( 1,670)
(
480)
(
80)

Charitable Donations
[(15%)($200) + (29%)($2,400 - $200)]

d

Federal Tax Payable

(

7,987)

(

668)
$33,939

Note 5 Since the son is over 16 years old and not disabled, his fitness fees are not eligible for the fitness credit. Mr. Bosworth’s credit is based on the $400 paid for his daughter, plus the $500 supplement that is available because she is under 18 and qualifies for the disability credit.
Note 6

The son’s available education credits are as follows:
Tuition
Ancillary Fees (Mandatory For All Students)
Tuition [(8)($400)]
Textbook [(8)($65)]

$ 7,650
560
3,200
520

Total

$11,930

As the son has Net Income For Tax Purposes of $12,450, he must use $1,923 ($12,450
- $10,527) of this total. This means that the maximum transfer to his father will be
$3,077 ($5,000 - $1,923).

Canadian Tax Principles 2011/2012 - Solutions Manual

47

Solution To AP Four - 6
Note 7 The base for Mr. Bosworth’s medical expense credit can be calculated as follows: Eligible Medical Expenses
Andrew And His Spouse ($1,200 + $2.250)
Daughter
Lesser Of:
• [(3%)($188,189)] = $5,646
• 2011 Threshold Amount = $2,052
Son’s Medical Expenses
Reduced By The Lesser Of:
• $2,052
• [(3%)($12,450)] = $374

$ 3,450
11,250
( 2,052)

$2,340
(

374)

Total Credit Base

1,966
$14,614

Prior to 2011, medical expenses claimed for an adult dependant were limited to an absolute amount of $10,000. The March 22, 2011 budget proposes the elimination of this constraint.

d

zle hz 48

Canadian Tax Principles 2011/2012 - Solutions Manual

Solution To AP Tax Software Four - 1

Solution to Problem For Tax Software Four - 1
This solution includes selected schedules and worksheets from the ProFile T1 return.
Note that the program can only be used to calculate 2010 (not 2011) tax returns and the problem and solution reflect this fact.
The complete tax return is available on the Instructor’s Resource CD-ROM under the heading “Tax Software Assignment Problems” in two forms, a ProFile version and a
.PDF version.
·

To view the .PDF file that contains the complete tax return, select the file “PDF
Software Problem 4-1” from the PDF Format drop-down list.

·

To view the ProFile file of the complete tax return, select the file “Software
Problem 4-1” from the ProFile Format drop-down list.

For more information on how to use the ProFile tax program, please refer to the sample tax returns in the Study Guide.

zle hz Analysis
Since Mr. Cole’s Net Income For Tax Purposes is only his employment income of $16,500, his
Tax Payable before credits is only $2,475 [(15%)($16,500)], less than his available non-refundable credits. Given this, he should not claim credits that can either be used by others or carried forward to subsequent years.
Based on this approach, he should not transfer any of the education related amounts as Robert and Sarah can carry forward these amounts indefinitely.
He would also not claim the credit for charitable donations as it can be carried forward for five years. Medical expenses can also be carried forward to the following year, but the problem states that Mr. Cole wishes to claim his medical expenses on a calendar year basis. Given all his allowable medical expenses are eligible for the refundable medical expense supplement, it would be advisable for him not to carry forward any medical expenses..
Based on this analysis, his total credits will exceed his Tax Payable in this version of the problem. However, there are no further alternatives for using or carrying forward any other credits. d

Notes
·

When the Universal Child Care Benefits are input on Buddy’s Form RC62, the amounts will be transferred to show on S2 as Natasha’s income.

·

Richard, Sarah, Eunice, and Earl should all file tax returns in order to receive the GST credit. Filing a tax return will also make the unused education related tax credits of
Richard and Sarah easier to keep track of for carry forward purposes. Sarah, Eunice, and
Earl will need to have a Social Insurance Number to file returns.

·

The ITA 118(1)(d) infirm dependant over 17 tax credit is only available for dependants who have attained the age of 18 by the end of the year and are dependent because of mental or physical infirmity. The only dependant of Mr. Cole who satisfies these criteria is his mother. However, since he is claiming the caregiver tax credit for her, he cannot claim this credit for her.

·

Mr. Cole’s mother’s unused disability tax credit can be transferred to him. If she filed a tax return, her age credit (which cannot be transferred to Buddy) would eliminate any Tax
Payable.

·

The medical expense rules require that the medical expense payments be paid in respect of medical services provided to persons who are dependants of Buddy within the meaning

Canadian Tax Principles 2011/2012 - Solutions Manual

49

Solution To AP Tax Software Four - 1 of ITA 118(6). ITA 118(6) requires that the persons be dependent on Buddy at some point during the year for support and that they are his children. Since it is stated in the problem that the children of Ms. Holt and Mr. Cole are not dependent on him for support, Megan’s medical expenses cannot be claimed by him.
·

An individual can claim a tax credit based on the medical expenses of a spouse and any other individual who meets the ITA 118(6) definition of a dependant. The medical expenses of Lori Cole ($300) and Dolly Holt ($675) would not be eligible as neither woman is his spouse or common-law partner.

·

Buddy has paid installments based on the CRA’s Instalment Reminders. Given the amount of his refund, they were unnecessary. Buddy should review his estimated net tax owing periodically in the future to determine whether instalments should be paid.

d

zle hz 50

Canadian Tax Principles 2011/2012 - Solutions Manual

Tax Software Assignment Problem Four - 1
Cole, Buddy-Chapter 4 Problem SIN: 527 000 061

Summary

2010 Tax Summary (Federal)
Buddy-Chapter 4 Problem

Total income
Employment *
Old Age Security
CPP/QPP benefits
Other pensions
Split-pension amount
Universal Child Care Benefit
Employment Insurance
Taxable dividends
Interest
Limited partnership
RDSP
Rental
Taxable capital gains
Support payments
RRSP
Other
Self-employment *
Workers' compensation and social assistance

101
113
114
115
116
117
119
120
121
122
125
126
127
128
129
130
135
147

Total income 150

207
208
210
212
213
214
215
217
219
220
221
222
224
229
235
231
Net income 236

244
248
249
250
251
254
255
256
Taxable income 260

2011 Estimated
GST/HST credit
Child Tax Benefit
RRSP contribution limit
*

Total payable
Federal tax
Non-refundable tax credits
Dividend tax credit
Min. tax carry-over/other *

404
350
425
426
Basic federal tax 429

7,239

3,430
53,366
8,005
8,005
2,475
8,005

405
406
410
414
417
415
418
Net federal tax 420
CPP contributions payable
421
EI self-employment
430
Social benefits repayment
422
Provincial/territorial tax
428
Total payable 435
Federal tax
Political/inv. tax credit/other *
Labour-sponsored tax credit
Alternative minimum tax
WITB Prepayment (RC210)
Additional tax on RESP

16,500

16,500

Buddy-Chapter 4 Problem

More than one line is considered

10,382
6,446
5,582
10,505
8,446
285
1,051

Non resident surtax
Foreign tax credits / other

d

Taxable income
Canadian Forces personnel
Home relocation loan
Security options deductions
Other payments deduction
Losses of other years *
Capital gains deduction
Northern residents
Additional deductions

16,500

300
301
303
367
306
308
363
364
365
369
313
314
316
318
319
323
332
Subtotal 335
338
Credit at 15%
Donations and gifts
349
Non-refundable tax credits 350

zle hz Net income
RPP
RRSP *
Split-Pension Deduction
Union and professional dues
UCCB repayment
Child care expenses
Disability supports deduction
Business investment loss
Moving expenses
Support payments
Carrying charges and interest
CPP/QPP/PIPP *
Exploration and development
Employment expenses
Social benefits repayment
Other deductions *

16,500

Buddy-Chapter 4 Problem
Non-refundable tax credits
Basic personal amount
Age amount
Spouse / eligible dependant *
Amount for children
Infirm/caregiver *
CPP/QPP/PPIP/EI *
Canada employment amount
Public transit passes amount
Children's fitness amount
Home buyers/Home renovation *
Adoption expenses
Pension income amount
Disability amount
Transfers *
Interest on student loans
Tuition / education
Medical expenses

1,171 00
2,970 00

Total credits
Income tax deducted *
QC or YT abatement *
CPP/EI overpayment *
Medical expense supplement
WITB (Schedule 6)
Other credits *

437
440
448
452
453
454
GST/HST rebate
457
Instalments
476
Provincial tax credits
479
Total credits 482
Balance owing (refund)
Combined balance (refund)

500

858
1,682

4,000
7,039
(7,039)
(7,039)

Complete Return Available On Instructor's CD-ROM
51

Page 1 of 1

Tax Software Assignment Problem Four - 1
Cole, Buddy-Chapter 4 Problem SIN: 527 000 061

T1-2010

Federal Tax

Schedule 1

Complete this schedule, and attach a copy to your return.
For more information, see the related line in the guide.

Step 1 - Federal non-refundable tax credits
Basic personal amount

claim $10,382 300

10,382 00 1

Age amount (if you were born in 1945 or earlier) (use federal worksheet)
(maximum $6,446) 301
Spouse or common-law partner amount: (if negative, enter "0")
10,382 minus (
4,800 00 his or her net income from page 1 of your return) = 303
$
Amount for an eligible dependant (attach schedule 5) (if negative, enter "0")
$
10,382 minus (
0 00 his or her net income) = 305
Amount for children born in 1993 or later
Number of children 366
5 x $2,101
= 367

6,446 00 2
5,582 00 3
4
10,505 00 5

306

363
364
365
369
313
314
315
316

1,051 00 11
12
13
14
15
16
8,446 00 17
18

Disability amount transferred from a dependant (use federal worksheet)
Interest paid on your student loans
Tuition, education, and textbook amounts (attach Schedule 11)
Tuition, education, and textbook amounts transferred from a child
Amounts transferred from your spouse or common-law partner (attach Schedule 2)
Medical expenses for self, spouse or common-law partner, and your dependent children born in 1993 or later
Minus: $2,024 or 3% of line 236, whichever is less
Subtotal (if negative, enter "0")
Allowable amount of medical expenses for other dependants
(see the calculation at line 331 in the guide and attach Schedule 5)
Add lines (A) and (B).
Add lines 1 to 24.

318
319
323
324
326

7,239 00 19
20
21
22
23

1,125 00 (B)
3,430 00
332
335

3,430 00 24
53,366 00 25

338
349

8,004 90 26
27

Total federal non-refundable tax credits 350

8,004 90 28

zle hz Amount for infirm dependants age 18 or older (use federal worksheet and attach Schedule 5)
CPP or QPP contributions: through employment from box 16 and box 17 on all T4 slips
(maximum $2,163.15) on self-employment and other earnings (attach Schedule 8)
Employment Insurance premiums: through employment from box 18 and box 55 on all T4 slips
(maximum $747.36) on self-employment and other eligible earnings (attach Schedule 13)
Canada employment amount
(if you reported employment income on line 101 or line 104, see line 363 in the guide)
(maximum $1,051)
Public transit amount
Children's fitness amount
Home buyers' amount (see line 369 in the guide)
Adoption expenses
Pension income amount (use federal worksheet)
(maximum $2,000)
Caregiver amount (use federal worksheet and attach Schedule 5)
Disability amount (for self) (claim $7,239 or if you were under age 18, use federal worksheet)

330

d

Multiply the amount on line 25 by 15%.
Donations and gifts (attach Schedule 9)
Add lines 26 and 27.
Enter this amount on line 40.

331

6

308
310
312
317

7
8
285 00

9
10

2,800 00
495 00
2,305 00 (A)

Complete Return Available On Instructor's CD-ROM
52

Page 1 of 2

Tax Software Assignment Problem Four - 1
Cole, Buddy-Chapter 4 Problem SIN: 527 000 061

Step 2 - Federal tax on taxable income
Enter your taxable income from line 260 of your return.
Use the amount on line 29 to determine which ONE of the following columns you have to complete.
Enter the amount from line 29.
Base amount
Line 30 minus line 31 (cannot be negative)
Rate
Multiply line 32 by line 33.
Tax on base amount

16,500 00 29
If line 29 is more than $40,970 but not more than
$81,941

If line 29 is
$40,970 or less

If line 29 is more than $81,941 but not more than
$127,021

If line 29 is more than $127,021

16,500 00
40,970 00 x Add lines 34 and 35.

16,500 00
15 %
2,475 00
0 00

x

81,941 00

22 %

x

6,146 00

26 %

x

15,159 00

30
127,021 00 31
32
29 % 33
34
26,880 00 35

2,475 00

36

Step 3 - Net federal tax
Enter the amount from line 36
Federal tax on split income (from line 5 of Form T1206)
Add lines 37 and 38.

2,475 00 37
38
2,475 00

424
404

zle hz Enter your non-refundable tax credits from line 28.
Federal dividend tax credit (see line 425 in the guide)
Overseas employment tax credit (attach Form T626)
Minimum tax carryover (attach Form T691)
Add lines 40 to 43.
Line 39 minus line 44 (if negative, enter "0").

350
425
426
427

8,004 90

40
41
42
43

8,004 90

8,004 90 44

Basic federal tax 429

45

405

46

Federal tax 406

0 00 47

Federal foreign tax credit (attach Form T2209)
Federal logging tax credit
Line 45 minus line 46 (if negative, enter "0")

Total federal political contributions (attach receipts)

2,475 00 39

409

d

410
Federal political contribution tax credit (use federal worksheet)
412
Investment tax credit (attach Form T2038(IND))
Labour-sponsored funds tax credit
Net cost 413
Allowable credit 414
Add lines 48, 49 and 50.
416
Line 47 minus line 51 (if negative, enter "0")
If you have an amount on line 38 above, see Form T1206
Working Income Tax Benefit (WITB) advance payments received (box 10 on the RC210 slip).
Additional tax on RESP accumulated income payments ( attach Form T1172)
Add lines 52, 53, and 54.
Enter this amount on line 420 of your return.
Net federal tax

48
49
50
51
417
415
418
420

52
53
54
0 00 55

Complete Return Available On Instructor's CD-ROM
53

Privacy Act, Personal Information Bank number CRA PPU 005
Page 2 of 2

Solution To AP Tax Software Four - 2

Solution to Problem For Tax Software Four - 2
This solution includes selected schedules and worksheets from the ProFile T1 return.
Note that the program can only be used to calculate 2010 (not 2011) tax returns and the problem and solution reflect this fact.
The complete tax return is available on the Instructor’s Resource CD-ROM under the heading “Tax Software Assignment Problems” in two forms, a ProFile version and a
.PDF version.
·

To view the .PDF file that contains the complete tax return, select the file “PDF
Software Problem 4-2” from the PDF Format drop-down list.

·

To view the ProFile file of the complete tax return, select the file “Software
Problem 4-2” from the ProFile Format drop-down list.

For more information on how to use the ProFile tax program, please refer to the sample tax returns in the Study Guide.

Notes To Tax Return
Since Valerie’s father David is not a Canadian resident, he cannot be claimed as a dependant. His medical expense cannot be claimed either.

·

Valerie’s age credit is transferred to George as her Net Income For Tax Purposes is less than the basic personal amount.

·

Kevin’s disability credit for all ages and his disability supplement credit for under 18 are transferred to George.

·

Martin’s education related credits can only be transferred to a spouse, parent, or grandparent. As a result, they cannot be transferred to George and must be carried forward by
Martin for his own use.

·

Although it will not affect George Hall, Martin should file his tax return to receive the GST credit. Filing a tax return will also make his education related tax credits easier to keep track of for carry forward purposes.

·

Joan Parker should file a tax return to receive the GST credit. She would need a Social
Insurance Number before she can file a return.

·

The cost of a residential phone line, the internet connection, mortgage interest, and mortgage life insurance premiums cannot be deducted as home office costs. Since we are ignoring GST implications, this means that George is not eligible for the GST rebate. His workspace in the home expenses should be input on form T777Details and the question at the top of the T777Details form “Do you qualify for the GST/HST Rebate?” should be answered “No”.

·

The new computer and software are capital assets and no part of their cost can be deducted as an employment expense.

d

zle hz 54

·

Canadian Tax Principles 2011/2012 - Solutions Manual

Tax Software Assignment Problem Four - 2
Hall, George-Chapter 4 Problem SIN: 527 000 509

Summary

2010 Tax Summary (Federal)
George-Chapter 4 Problem

Total income
Employment *
Old Age Security
CPP/QPP benefits
Other pensions
Split-pension amount
Universal Child Care Benefit
Employment Insurance
Taxable dividends
Interest
Limited partnership
RDSP
Rental
Taxable capital gains
Support payments
RRSP
Other
Self-employment *
Workers' compensation and social assistance

101
113
114
115
116
117
119
120
121
122
125
126
127
128
129
130
135
147

Total income 150

207
208
210
212
213
214
215
217
219
220
221
222
224
229
235
231
Net income 236

244
248
249
250
251
254
255
256
Taxable income 260

2011 Estimated
GST/HST credit
Child Tax Benefit
RRSP contribution limit
*

Total payable
Federal tax
Non-refundable tax credits
Dividend tax credit
Min. tax carry-over/other *

404
350
425
426
Basic federal tax 429

2,301

375,699

375,699

George-Chapter 4 Problem

More than one line is considered

10,382
4,582
2,101
4,223
2,911
1,051

17,908

37,625
80,782
12,117
1,248
13,365
98,997
13,365

85,631

Non resident surtax
Foreign tax credits / other

405
406
410
414
417
415
418
Net federal tax 420
CPP contributions payable
421
EI self-employment
430
Social benefits repayment
422
Provincial/territorial tax
428
Total payable 435
Federal tax
Political/inv. tax credit/other *
Labour-sponsored tax credit
Alternative minimum tax
WITB Prepayment (RC210)
Additional tax on RESP

d

Taxable income
Canadian Forces personnel
Home relocation loan
Security options deductions
Other payments deduction
Losses of other years *
Capital gains deduction
Northern residents
Additional deductions

378,000

300
301
303
367
306
308
363
364
365
369
313
314
316
318
319
323
332
Subtotal 335
338
Credit at 15%
Donations and gifts
349
Non-refundable tax credits 350

zle hz Net income
RPP
RRSP *
Split-Pension Deduction
Union and professional dues
UCCB repayment
Child care expenses
Disability supports deduction
Business investment loss
Moving expenses
Support payments
Carrying charges and interest
CPP/QPP/PIPP *
Exploration and development
Employment expenses
Social benefits repayment
Other deductions *

378,000

George-Chapter 4 Problem
Non-refundable tax credits
Basic personal amount
Age amount
Spouse / eligible dependant *
Amount for children
Infirm/caregiver *
CPP/QPP/PPIP/EI *
Canada employment amount
Public transit passes amount
Children's fitness amount
Home buyers/Home renovation *
Adoption expenses
Pension income amount
Disability amount
Transfers *
Interest on student loans
Tuition / education
Medical expenses

85,450 00

Total credits
Income tax deducted *
QC or YT abatement *
CPP/EI overpayment *
Medical expense supplement
WITB (Schedule 6)
Other credits *

437
440
448
452
453
454
GST/HST rebate
457
Instalments
476
Provincial tax credits
479
Total credits 482
Balance owing (refund)
Combined balance (refund)

85,631

85,631

26,130
111,761
114,000

114,000
(2,239)
(2,239)

Complete Return Available On Instructor's CD-ROM
55

Page 1 of 1

Tax Software Assignment Problem Four - 2
Hall, George-Chapter 4 Problem SIN: 527 000 509

T1-2010

Federal Tax

Schedule 1

Complete this schedule, and attach a copy to your return.
For more information, see the related line in the guide.

Step 1 - Federal non-refundable tax credits
Basic personal amount

claim $10,382 300

10,382 00 1

Age amount (if you were born in 1945 or earlier) (use federal worksheet)
(maximum $6,446) 301
Spouse or common-law partner amount: (if negative, enter "0")
10,382 minus (
5,800 00 his or her net income from page 1 of your return) = 303
$
Amount for an eligible dependant (attach schedule 5) (if negative, enter "0")
$
10,382 minus (
0 00 his or her net income) = 305
Amount for children born in 1993 or later
Number of children 366
1 x $2,101
= 367

2
4,582 00 3
4
2,101 00 5

306

363
364
365
369
313
314
315
316

1,051 00 11
12
13
14
15
16
4,223 00 17
18

Disability amount transferred from a dependant (use federal worksheet)
Interest paid on your student loans
Tuition, education, and textbook amounts (attach Schedule 11)
Tuition, education, and textbook amounts transferred from a child
Amounts transferred from your spouse or common-law partner (attach Schedule 2)
Medical expenses for self, spouse or common-law partner, and your dependent children born in 1993 or later
Minus: $2,024 or 3% of line 236, whichever is less
Subtotal (if negative, enter "0")
Allowable amount of medical expenses for other dependants
(see the calculation at line 331 in the guide and attach Schedule 5)
Add lines (A) and (B).
Add lines 1 to 24.

318
319
323
324
326

11,462 00 19
20
21
22
6,446 00 23

7,786 00 (B)
37,624 54
332
335

37,624 54 24
80,782 05 25

338
349

12,117 31 26
1,248 00 27

Total federal non-refundable tax credits 350

13,365 31 28

zle hz Amount for infirm dependants age 18 or older (use federal worksheet and attach Schedule 5)
CPP or QPP contributions: through employment from box 16 and box 17 on all T4 slips
(maximum $2,163.15) on self-employment and other earnings (attach Schedule 8)
Employment Insurance premiums: through employment from box 18 and box 55 on all T4 slips
(maximum $747.36) on self-employment and other eligible earnings (attach Schedule 13)
Canada employment amount
(if you reported employment income on line 101 or line 104, see line 363 in the guide)
(maximum $1,051)
Public transit amount
Children's fitness amount
Home buyers' amount (see line 369 in the guide)
Adoption expenses
Pension income amount (use federal worksheet)
(maximum $2,000)
Caregiver amount (use federal worksheet and attach Schedule 5)
Disability amount (for self) (claim $7,239 or if you were under age 18, use federal worksheet)

330

d

Multiply the amount on line 25 by 15%.
Donations and gifts (attach Schedule 9)
Add lines 26 and 27.
Enter this amount on line 40.

331

6

308
310

2,163 15

312
317

747 36

7
8
9
10

31,862 54
2,024 00
29,838 54 (A)

Complete Return Available On Instructor's CD-ROM
56

Page 1 of 2

Tax Software Assignment Problem Four - 2
Hall, George-Chapter 4 Problem SIN: 527 000 509

Step 2 - Federal tax on taxable income
Enter your taxable income from line 260 of your return.
Use the amount on line 29 to determine which ONE of the following columns you have to complete.
Enter the amount from line 29.
Base amount
Line 30 minus line 31 (cannot be negative)
Rate
Multiply line 32 by line 33.
Tax on base amount

375,699 00 29
If line 29 is more than $40,970 but not more than
$81,941

If line 29 is
$40,970 or less

If line 29 is more than $81,941 but not more than
$127,021

40,970 00 x 0 00
15 %

x

0 00

If line 29 is more than $127,021

81,941 00

22 %

x

6,146 00

26 %

x

15,159 00

Add lines 34 and 35.

375,699 00
127,021 00
248,678 00
29 %
72,116 62
26,880 00

30
31
32
33
34
35

98,996 62 36

Step 3 - Net federal tax
Enter the amount from line 36
Federal tax on split income (from line 5 of Form T1206)
Add lines 37 and 38.

98,996 62 37
38
98,996 62

424
404

zle hz Enter your non-refundable tax credits from line 28.
Federal dividend tax credit (see line 425 in the guide)
Overseas employment tax credit (attach Form T626)
Minimum tax carryover (attach Form T691)
Add lines 40 to 43.
Line 39 minus line 44 (if negative, enter "0").

350
425
426
427

13,365 31

40
41
42
43

13,365 31

13,365 31 44

Basic federal tax 429

85,631 31 45

405

46

Federal tax 406

85,631 31 47

Federal foreign tax credit (attach Form T2209)
Federal logging tax credit
Line 45 minus line 46 (if negative, enter "0")

Total federal political contributions (attach receipts)

98,996 62 39

409

d

410
Federal political contribution tax credit (use federal worksheet)
412
Investment tax credit (attach Form T2038(IND))
Labour-sponsored funds tax credit
Net cost 413
Allowable credit 414
Add lines 48, 49 and 50.
416
Line 47 minus line 51 (if negative, enter "0")
If you have an amount on line 38 above, see Form T1206
Working Income Tax Benefit (WITB) advance payments received (box 10 on the RC210 slip).
Additional tax on RESP accumulated income payments ( attach Form T1172)
Add lines 52, 53, and 54.
Enter this amount on line 420 of your return.
Net federal tax

48
49
50
51
417
415
418

85,631 31 52
53
54

420

85,631 31 55

Complete Return Available On Instructor's CD-ROM
57

Privacy Act, Personal Information Bank number CRA PPU 005
Page 2 of 2

Solution To AP Tax Software Four - 3

Solution to Problem For Tax Software Four - 3
This solution includes selected schedules and worksheets from the ProFile T1 return.
Note that the program can only be used to calculate 2010 (not 2011) tax returns and the problem and solution reflect this fact.
The complete tax return is available on the Instructor’s Resource CD-ROM under the heading “Tax Software Assignment Problems” in two forms, a ProFile version and a
.PDF version.
·

To view the .PDF file that contains the complete tax return, select the file “PDF
Software Problem 4-3” from the PDF Format drop-down list.

·

To view the ProFile file of the complete tax return, select the file “Software
Problem 4-3” from the ProFile Format drop-down list.

For more information on how to use the ProFile tax program, please refer to the sample tax returns in the Study Guide.

Notes To Tax Return

zle hz Either spouse can claim the charitable donations made by the couple, including donations shown on Mary ’s T4. As we are assuming Seymour has no income, they have been claimed by
Mary.
The “Summary ” form is available in the Form Explorer and shows the balance (refund). In addition, the data monitor that is at the bottom of the screen also shows the balance (refund) for each province. The comparison of the total federal and provincial Tax Payable or refund, in the order that the provinces are listed in the ProFile drop down menu (west to east, excluding Quebec) is as follows:
Province

Balance Owing (Refund)
($4,592)
( 7,508)
( 3,031)
1,723
(
595)
( 1,943)
2,509
2,433
(
983)
( 5,229)
( 6,069)
( 9,564)

d

British Columbia
Alberta
Saskatchewan
Manitoba
Ontario
New Brunswick (Original)
Nova Scotia
Prince Edward Island
Newfoundland
Yukon
Northwest Territories
Nunavut

The Summary form shows the following amounts.
Summary Line Changed

Mary

Seymour

Chapter 4
Employment Income

10,382

Spouse Credit

10,382

Child Credit

2,101

CPP Credit plus EI Credit

2,911

Canada Employment Credit

1,051

Donations
Balance Owing (Refund)

58

152,866

Basic Personal Amount

480
( 1,943)
Canadian Tax Principles 2011/2012 - Solutions Manual

Tax Software Assignment Problem Four - 3
Walford, Mary-Chap 4P SIN: 527 000 129

Summary

2010 Tax Summary (Federal)
Mary-Chap 4P

Total income
Employment *
Old Age Security
CPP/QPP benefits
Other pensions
Split-pension amount
Universal Child Care Benefit
Employment Insurance
Taxable dividends
Interest
Limited partnership
RDSP
Rental
Taxable capital gains
Support payments
RRSP
Other
Self-employment *
Workers' compensation and social assistance

101
113
114
115
116
117
119
120
121
122
125
126
127
128
129
130
135

147
Total income 150
207
208
210
212
213
214
215
217
219
220
221
222
224
229
235
231
Net income 236

244
248
249
250
251
254
255
256
Taxable income 260

2011 Estimated
GST/HST credit
Child Tax Benefit
RRSP contribution limit
*

More than one line is considered

Total payable
Federal tax
Non-refundable tax credits
Dividend tax credit
Min. tax carry-over/other *

404
350
425
426
Basic federal tax 429

10,382
10,382
2,101
2,911
1,051

26,827
4,024
480
4,503
34,375
4,503

29,872

Non resident surtax
Foreign tax credits / other

405
406
410
414
417
415
418
Net federal tax 420
CPP contributions payable
421
EI self-employment
430
Social benefits repayment
422
Provincial/territorial tax
428
Total payable 435
Federal tax
Political/inv. tax credit/other *
Labour-sponsored tax credit
Alternative minimum tax
WITB Prepayment (RC210)
Additional tax on RESP

152,866

d

Taxable income
Canadian Forces personnel
Home relocation loan
Security options deductions
Other payments deduction
Losses of other years *
Capital gains deduction
Northern residents
Additional deductions

152,866

300
301
303
367
306
308
363
364
365
369
313
314
316
318
319
323
332
Subtotal 335
338
Credit at 15%
Donations and gifts
349
Non-refundable tax credits 350

zle hz Net income
RPP
RRSP *
Split-Pension Deduction
Union and professional dues
UCCB repayment
Child care expenses
Disability supports deduction
Business investment loss
Moving expenses
Support payments
Carrying charges and interest
CPP/QPP/PIPP *
Exploration and development
Employment expenses
Social benefits repayment
Other deductions *

152,866

Mary-Chap 4P
Non-refundable tax credits
Basic personal amount
Age amount
Spouse / eligible dependant *
Amount for children
Infirm/caregiver *
CPP/QPP/PPIP/EI *
Canada employment amount
Public transit passes amount
Children's fitness amount
Home buyers/Home renovation *
Adoption expenses
Pension income amount
Disability amount
Transfers *
Interest on student loans
Tuition / education
Medical expenses

152,866

Mary-Chap 4P

44,450 00

Total credits
Income tax deducted *
QC or YT abatement *
CPP/EI overpayment *
Medical expense supplement
WITB (Schedule 6)
Other credits *

29,872

29,872

16,851
46,722

437
440
448
452
453
454
GST/HST rebate
457
Instalments
476
Provincial tax credits
479
Total credits 482

48,665

Balance owing (refund)

(1,943)

Combined balance (refund)

48,665
(1,943)

Complete Return Available On Instructor's CD-ROM
59

Page 1 of 1

Tax Software Assignment Problem Four - 3
Walford, Mary-Chap 4P SIN: 527 000 129

T1-2010

Federal Tax

Schedule 1

Complete this schedule, and attach a copy to your return.
For more information, see the related line in the guide.

Step 1 - Federal non-refundable tax credits
Basic personal amount

claim $10,382 300

10,382 00 1

Age amount (if you were born in 1945 or earlier) (use federal worksheet)
(maximum $6,446) 301
Spouse or common-law partner amount: (if negative, enter "0")
10,382 minus (
0 00 his or her net income from page 1 of your return) = 303
$
Amount for an eligible dependant (attach schedule 5) (if negative, enter "0")
$
10,382 minus (
0 00 his or her net income) = 305
Amount for children born in 1993 or later
Number of children 366
1 x $2,101
= 367

2
10,382 00 3
4
2,101 00 5

306

363
364
365
369
313
314
315
316

1,051 00 11
12
13
14
15
16
17
18

Disability amount transferred from a dependant (use federal worksheet)
Interest paid on your student loans
Tuition, education, and textbook amounts (attach Schedule 11)
Tuition, education, and textbook amounts transferred from a child
Amounts transferred from your spouse or common-law partner (attach Schedule 2)
Medical expenses for self, spouse or common-law partner, and your dependent children born in 1993 or later
Minus: $2,024 or 3% of line 236, whichever is less
Subtotal (if negative, enter "0")
Allowable amount of medical expenses for other dependants
(see the calculation at line 331 in the guide and attach Schedule 5)
Add lines (A) and (B).
Add lines 1 to 24.

318
319
323
324
326

19
20
21
22
23

332
335

24
26,826 51 25

338
349

4,023 98 26
479 50 27

Total federal non-refundable tax credits 350

4,503 48 28

zle hz Amount for infirm dependants age 18 or older (use federal worksheet and attach Schedule 5)
CPP or QPP contributions: through employment from box 16 and box 17 on all T4 slips
(maximum $2,163.15) on self-employment and other earnings (attach Schedule 8)
Employment Insurance premiums: through employment from box 18 and box 55 on all T4 slips
(maximum $747.36) on self-employment and other eligible earnings (attach Schedule 13)
Canada employment amount
(if you reported employment income on line 101 or line 104, see line 363 in the guide)
(maximum $1,051)
Public transit amount
Children's fitness amount
Home buyers' amount (see line 369 in the guide)
Adoption expenses
Pension income amount (use federal worksheet)
(maximum $2,000)
Caregiver amount (use federal worksheet and attach Schedule 5)
Disability amount (for self) (claim $7,239 or if you were under age 18, use federal worksheet)

308
310

2,163 15

312
317

747 36

7
8
9
10

330

d

Multiply the amount on line 25 by 15%.
Donations and gifts (attach Schedule 9)
Add lines 26 and 27.
Enter this amount on line 40.

6

331

2,024 00
(A)
(B)

Complete Return Available On Instructor's CD-ROM
60

Page 1 of 2

Tax Software Assignment Problem Four - 3
Walford, Mary-Chap 4P SIN: 527 000 129

Step 2 - Federal tax on taxable income
Enter your taxable income from line 260 of your return.
Use the amount on line 29 to determine which ONE of the following columns you have to complete.
Enter the amount from line 29.
Base amount
Line 30 minus line 31 (cannot be negative)
Rate
Multiply line 32 by line 33.
Tax on base amount

152,866 08 29
If line 29 is more than $40,970 but not more than
$81,941

If line 29 is
$40,970 or less

If line 29 is more than $81,941 but not more than
$127,021

40,970 00 x 0 00
15 %

x

0 00

If line 29 is more than $127,021

81,941 00

22 %

x

6,146 00

26 %

x

15,159 00

Add lines 34 and 35.

152,866 08
127,021 00
25,845 08
29 %
7,495 07
26,880 00

30
31
32
33
34
35

34,375 07 36

Step 3 - Net federal tax
Enter the amount from line 36
Federal tax on split income (from line 5 of Form T1206)
Add lines 37 and 38.

34,375 07 37
38
34,375 07

424
404

zle hz Enter your non-refundable tax credits from line 28.
Federal dividend tax credit (see line 425 in the guide)
Overseas employment tax credit (attach Form T626)
Minimum tax carryover (attach Form T691)
Add lines 40 to 43.
Line 39 minus line 44 (if negative, enter "0").

350
425
426
427

4,503 48

40
41
42
43

4,503 48

4,503 48 44

Basic federal tax 429

29,871 59 45

405

46

Federal tax 406

29,871 59 47

Federal foreign tax credit (attach Form T2209)
Federal logging tax credit
Line 45 minus line 46 (if negative, enter "0")

Total federal political contributions (attach receipts)

34,375 07 39

409

d

410
Federal political contribution tax credit (use federal worksheet)
412
Investment tax credit (attach Form T2038(IND))
Labour-sponsored funds tax credit
Net cost 413
Allowable credit 414
Add lines 48, 49 and 50.
416
Line 47 minus line 51 (if negative, enter "0")
If you have an amount on line 38 above, see Form T1206
Working Income Tax Benefit (WITB) advance payments received (box 10 on the RC210 slip).
Additional tax on RESP accumulated income payments ( attach Form T1172)
Add lines 52, 53, and 54.
Enter this amount on line 420 of your return.
Net federal tax

48
49
50
51
417
415
418

29,871 59 52
53
54

420

29,871 59 55

Complete Return Available On Instructor's CD-ROM
61

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Page 2 of 2

d

zle hz 62

Canadian Tax Principles 2011/2012 - Solutions Manual

Solution To AP Five - 1

CHAPTER FIVE SOLUTIONS
Solution to Assignment Problem Five - 1
Part A
As the manufacturing and processing equipment was purchased after March 18, 2007 and before January 1, 2014, it would be allocated to Class 29. CCA for this Class is determined on a 50 percent straight line basis. This results in a 25%/50%/25% straight line write-off after consideration of the half-year rule.
The maximum CCA for 2010, 2011 and 2012 would be calculated as follows:
Capital Cost Of M&P Assets
2010 CCA [(50%)(1/2)($500,000)]

$500,000
( 125,000)

UCC January 1, 2011
2011 CCA [(50%)($500,000 Original Cost)]

$375,000
( 250,000)

UCC January 1, 2012
2012 CCA (Balance In Class)

$125,000
( 125,000)

UCC January 1, 2013

Nil

zle hz Part B
If the new building is placed in the existing Class 1 and is not put into a separate Class 1, the applicable CCA rate will be 4 percent.
Assuming the building is put into a separate Class 1, the applicable CCA rates will be as follows: Alternative 1 - 100 percent for manufacturing

Since the building will be used more than 90 percent for manufacturing , the CCA rate is 10 percent.
Alternative 2 - 60 percent for manufacturing and 40 percent for office space

d

Since the building will not be used more than 90 percent for manufacturing , but will be used more than 90 percent for non-residential purposes, the CCA rate is 6 percent.
Alternative 3 - 40 percent for manufacturing , 30 percent for office space and 30 percent for long-term residential rentals
Since the building will not be used more than 90 percent for non-residential purposes, the CCA rate is 4 percent. This is the same rate as would apply if the building was added to the existing Class 1.

Canadian Tax Principles 2011/2012 - Solutions Manual

63

Solution To AP Five - 2

Solution to Assignment Problem Five - 2
Note to Instructor This problem assumes that students will know that the terminal loss is deducted when calculating net rental income. This is covered in detail in
Chapter 7, Property Income.

2010
The maximum CCA for 2010 would be calculated as follows:
Class 1
Addition
One-Half Net Additions

Class 8

$575,000
( 287,500)

CCA Base
Maximum CCA:
[(4%)($287,500)]
[(20%)($9,250)]
Add: One-Half Net Additions

(

$287,500
(

$18,500
9,250)
$ 9,250

11,500)
(

1,850)
9,250

287,500

January 1, 2011 UCC

$563,500

$16,650

zle hz As the maximum 2010 CCA of $13,350 ($11,500 + $1,850) is less than the 2010 net rental income before CCA of $15,500 ($43,500 - $28,000), the full amount can be deducted.
Note that when an individual uses assets to produce property income (e.g ., rental income), the full calendar year is considered to be the taxation year of the individual. This means that the short fiscal period rules are not applicable to Ms. Fox.

2011
The terminal loss for Class 8 would be calculated as follows:
January 1, 2011 UCC
Disposition - Lesser Of:
• Proceeds Of Disposition = $14,000
• Cost = $18,500

( 14,000)

Balance Before Terminal Loss
Terminal Loss

(

d

January 1, 2012 UCC

$16,650

$ 2,650
2,650)
Nil

The terminal loss will be deducted from the Class 8 UCC leaving a January 1, 2012 balance of nil. The 2011 net rental income before CCA is $10,350 ($45,000 - $32,000 - $2,650) and includes the Class 8 terminal loss. As a result, the Class 1 CCA for 2011 would be calculated as follows: January 1, 2011 UCC
CCA Deducted - Lesser Of:
• Maximum Available = [(4%)($563,500)] = $22,540
• Net Rental Income = $10,350
January 1, 2012 UCC

$563,500
(

10,350)
$553,150

While the maximum 2011 CCA on the building would be $22,540, the CCA deductible is limited to the net rental income before CCA of $10,350.

64

Canadian Tax Principles 2011/2012 - Solutions Manual

Solution To AP Five - 3

Solution to Assignment Problem Five - 3
Class 1 and Class 3 - Buildings
As the new non-residential building has been allocated to a separate Class 1, it is eligible for a
6 percent rate for CCA. Based on this, the maximum CCA amounts and January 1, 2012 UCC balances are as follows:
Separate Class 1
Addition
One-Half Net Additions

Class 3

$258,000
( 129,000)

CCA Base/Opening UCC
Maximum CCA:
[(6%)($129,000)]
[(5%)($1,562,000)]
Add: One-Half Net Additions

$129,000
(

$1,562,000

7,740)
( 78,100)
N/A

129,000

January 1, 2012 UCC

N/A

$250,260

$1,483,900

Class 8 - Office Furniture And Equipment
The required calculations for this class would be as follows:

zle hz Opening Balance
Additions
Disposition of Furniture - Lesser Of:
• Capital Cost = $38,000
• Proceeds Of Disposition = $42,000
Disposition Due To Fire - Lesser Of:
• Capital Cost = $18,000
• Proceeds Of Disposition = $11,000

$278,000

$72,000

( 38,000)
( 11,000)

23,000

One-Half Net Additions [(50%)($23,000)]

(

11,500)

CCA Base
2011 CCA [(20%)($289,500)]
One-Half Net Additions

(

$289,500
57,900)
11,500

January 1, 2012 UCC Balance

$243,100

d

With respect to the sale that occurred during the year, there would be a capital gain of $4,000
($42,000 - $38,000), one-half, or $2,000, of which would be included in the Company ’s Net
Income For Tax Purposes.

Class 10 - Vehicles
The required calculations for this class would be as follows:
Opening Balance
Additions
Disposition of Truck - Lesser Of:
• Capital Cost = $37,000
• Proceeds Of Disposition = $12,000

$204,000
$63,000
( 12,000)

51,000

One-Half Net Additions [(50%)($51,000)]

(

CCA Base
2011 CCA [(30%)($229,500)]
One-Half Net Additions

$229,500
( 68,850)
25,500

January 1, 2012 UCC Balance

$186,150

Canadian Tax Principles 2011/2012 - Solutions Manual

25,500)

65

Solution To AP Five - 3
Class 13 - Leasehold Improvements
In general, leasehold improvements will be written off over the term of the lease on a straight line basis. For purposes of applying this calculation, the term of the lease includes the first renewal option beginning in a period after the improvements were made. In the case of the original improvements, the period to be used is 10 years. With respect to the improvements during the current period, the write-off period will be 8 years. Also note that Class 13 assets are subject to the first year rules on net additions. The required calculation is as follows:
Opening Balance
Additions

$106,250
58,000

CCA Base
2011 Capital Cost Allowance:
• First Improvements ($125,000 ÷ 10)
• Current Improvements [($58,000 ÷ 8)(1/2)]

$164,250
(
(

January 1, 2012 UCC Balance

12,500)
3,625)
$148,125

Class 29 - Manufacturing Equipment
The required calculations are as follows:
$126,000
(

89,000)

Balance Before Terminal Loss
Terminal Loss

(

$ 37,000
37,000)

zle hz Opening Balance
Disposition - Lesser Of:
• Capital Cost = $504,000
• Proceeds Of Disposition = $89,000

January 1, 2012 UCC Balance

Nil

After all of the assets in Class 29 have been retired there is still a $37,000 UCC balance. This results in a terminal loss that will be deducted in full from the Net Income of Burton Steel Ltd.
The terminal loss will also be deducted from the UCC balance.

Class 50 - Computers
The required calculations are as follows:

January 1, 2012 UCC

d

Opening Balance
2011 CCA [(55%)($11,000)]

(

$11,000
6,050)
$ 4,950

Class 52 - Computers
Class 52 assets are subject to 100 percent write off in the year of acquisition, with no application of the half-year rule. The full $17,000 of acquisition cost will be deducted as CCA for
2011, leaving a January 1, 2012 UCC balance of nil.

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Canadian Tax Principles 2011/2012 - Solutions Manual

Solution To AP Five - 3
Summary Of The Results (Not Required)
The maximum CCA for the year ending December 31, 2011 and the January 1, 2012 UCC balances can be summarized as follows:
Maximum CCA
Class
Class
Class
Class
Class
Class
Class
Class

1
3
8
10
13
29
50
52

Totals

UCC

$

7,740
78,100
57,900
68,850
16,125
Terminal Loss
6,050
17,000

$ 250,260
1,483,900
243,100
186,150
148,125
Nil
4,950
Nil

$251,765

$2,316,485

In addition, the following income effects resulted from the information provided in the problem: $ 2,000
( 37,000)

Total Deduction

($35,000)

d

zle hz Taxable Capital Gain On Class 8 Assets [(1/2)($4,000)]
Terminal Loss On Class 29 Assets

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67

Solution To AP Five - 4

Solution to Assignment Problem Five - 4
2008 Solution
The required calculations are as follows:
Additions To Class 10 [(10 Cars)($18,000)]
One-Half Net Additions [(1/2)($180,000)]
CCA Base
CCA [(30%)($90,000)(61/365)]
One-Half Net Additions

(
(

Class 10 UCC For January 1, 2009

$180,000
90,000)
$ 90,000
4,512)
90,000
$175,488

Note that one-half of the net additions for the year is deducted to provide the basis for calculating the 2008 CCA, and then added back to establish the opening UCC for the next period.
The other point that is illustrated in this first year is application of the short fiscal period rules.
As the business was established on November 1, 2008, its operations were carried out for 61 days in 2008, 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. zle hz 2009 Solution
The required calculations are as follows:

Opening Balance For Class 10
Additions [(5 Cars)($22,000)]
Dispositions - Lesser Of:
• Capital Cost = 4 @ $18,000 = $72,000
• Proceeds Of Disposition = 4 @ $5,000 = $20,000
One-Half Net Additions [(1/2)($110,000 - $20,000)]
CCA Base
CCA [(30%)($220,488)]
One-Half Net Additions

$175,488
110,000
(
(

20,000)
45,000)

(

$220,488
66,146)
45,000

Class 10 UCC For January 1, 2010

$199,342

d

Here again, one-half of the net additions for the year are deducted in establishing the base for calculating CCA, with the same amount being added back to determine the opening UCC for the next period.

2010 Solution
With respect to Class 10 cars, the required calculations are as follows:
Opening Balance For Class 10
Additions [(8 Cars)($25,000)]
Dispositions - Lesser Of:
• Capital Cost = 6 @ $18,000 = $108,000
• Proceeds Of Disposition = 6 @ $2,000 = $12,000
One-Half Net Additions [(1/2)($200,000 - $12,000)]
CCA Base
CCA [(30%)($293,342)]
One-Half Net Addition
Class 10 UCC For January 1, 2011

68

$199,342
200,000
(
(

12,000)
94,000)

(

$293,342
88,003)
94,000
$299,339

Canadian Tax Principles 2011/2012 - Solutions Manual

Solution To AP Five - 4
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
Class 10.1

Mercedes 2
Class 10.1

Acquisitions
One-Half Net Additions

$30,000
( 15,000)

$30,000
( 15,000)

CCA Base
CCA [(30%)($15,000)]
One-Half Net Additions

(

UCC For January 1, 2011

$15,000
4,500)
15,000

(

$25,500

$15,000
4,500)
15,000
$25,500

2011 Solution
The required calculations for the Class 10 vehicles are as follows:

(

Balance Before Terminal Loss
Terminal Loss

$221,339
( 221,339)

zle hz Opening Balance For Class 10
Dispositions - Lesser Of:
• Capital Cost = 5 @ $22,000
+ 8 @ $25,000 = $310,000
• Proceeds Of Disposition = 13 @ $6,000 = $78,000

UCC For January 1, 2012

$299,339

78,000)

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. This means that on each of the Class 10.1 vehicles there would be a CCA deduction of
$3,825 [(1/2)(30%)($25,500)] for a total of $7,650.

d
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69

Solution To AP Five - 5

Solution to Assignment Problem Five - 5
Part A
The required calculation of the maximum CCA and CEC for 2011 is as follows:

Note 1

Class 8 (Note 1)
Class 10 [(30%)($152,000)]
Class 12 (Note 2)
Class 13 (Note 3)
CEC [(7%)($210,000)]

$ 46,600
45,600
56,000
32,000
14,700

Maximum Total

$194,900

The Class 8 CCA would be calculated as follows:
Opening Balance
Additions
Proceeds Of Disposition
One-Half Net Additions [(1/2)($42,000 - $16,000)]

$220,000
42,000
( 16,000)
( 13,000)
$233,000
20%

Maximum CCA

$ 46,600

zle hz CCA Base
CCA Rate

Note 2 The rate for Class 12 is 100 percent. However, some additions to this Class are subject to the half-year rules. The presence of an opening balance of $56,000 indicates that there must have been $112,000 of costs in 2010 that were subject to this rule. Given this, the entire balance could be deducted in 2011.
Note 3 The $272,000 balance in Class 13 is equal to 85 percent of $320,000. This means that during the two years 2009 and 2010, 15 percent of their cost was deducted as CCA. As the half-year rules are applicable to this Class, this represents a half year for 2009 and a full year for 2010. As Class 13 is a straight-line Class, this indicates that the CCA rate is 10 percent (15% ÷ 1.5). Based on this analysis, maximum
CCA for 2011 would be $32,000 [(10%)($320,000)].

d

Part B
Since the Company only has Net and Taxable Income before CCA and CEC of $51,000 and the problem states that loss carry overs should not be considered, maximum CCA and CEC would not be deducted. Only $51,000 in CCA and CEC should be taken in order to reduce the
Taxable Income to nil.
As to which balances of CCA or CEC should be reduced, the usual procedure is to deduct the required amount from the balances with the lowest rates. By leaving the balances with higher rates untouched, larger amounts of CCA and CEC can be deducted in later periods as required. Taking this approach, the recommended CCA and CEC deductions would be as follows:
CEC (Maximum Available)
Class 13 (Maximum Available)
Class 8 ($51,000 - $14,700 - $32,000)

$14,700
32,000
4,300

Total CCA

$51,000

The deduction of this amount of CCA and CEC would serve to reduce Taxable Income to nil.

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Canadian Tax Principles 2011/2012 - Solutions Manual

Solution To AP Five - 6

Solution to Assignment Problem Five - 6
Part A
The maximum CEC deductions for 2009, 2010, and 2011 would be calculated as follows:
CEC Balance CEC Deductions
Balance January 1, 2009
Acquisition [(3/4)($400,000)]

$2,345,000
300,000

Balance Before CEC Deduction
2009 CEC Amount [(7%)($2,645,000)]

(

$2,645,000
185,150)

$185,150

$2,459,850
(
(

180,000)
120,000)

Balance Before CEC
2010 CEC Amount [(7%)($2,159,850)]

(

$2,159,850
151,190)

Balance January 1, 2011
Disposition [(3/4)($560,000)]

(

$2,008,660
420,000)

Balance Before CEC
2011 CEC Amount [(7%)$1,588,660)]

(

$1,588,660
111,206)

111,206

$1,477,454

$447,546

zle hz Balance January 1, 2010
Dispositions:
Goodwill [(3/4)($240,000)]
Franchise [(3/4)($160,000)]

Balance January 1, 2012

151,190

Part B
As can be seen in the Part A table, the deductions for the dispositions always leave a positive
CEC balance. This means that no amount will have to be included in CRI’s Net Income For Tax
Purposes as a result of the dispositions.
Part C
With respect to the 2010 disposals, ITA 14(1.01) cannot be used for disposals of goodwill. In addition, it cannot be used when the proceeds of the disposition are less than the cost of the eligible capital expenditure. Given this, the 2010 results cannot be altered through the use of this election.

d

As the proceeds resulting from the 2011 election exceed the cost of the eligible capital expenditure, ITA 14(1.01) can be used. Under this election, three-quarters of the original cost would be deducted from the CEC balance, changing the Part A results as follows:
Balance January 1, 2011
Three-Quarters Of Cost [(3/4)($400,000)]

(

$2,008,660
300,000)

CEC Balance After Disposition
2011 CEC Amount [(7%)($1,708,660)]

(

$1,708,660
119,606)

Balance January 1, 2012
Proceeds Of Disposition
Cost Of Franchise

$1,589,054
$560,000
( 400,000)

Capital Gain
Inclusion Rate

$160,000
1/2

Taxable Capital Gain

$ 80,000

The probable reason for making this election would be that CRI has unused allowable capital losses from the current or previous years. By making this election the Company has created a taxable capital gain which will allow for the use of up to $80,000 in allowable capital losses.

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71

Solution To AP Five - 7

Solution to Assignment Problem Five - 7
Class 1
The calculations related to the building that was replaced are as follows:
Opening UCC Balance
Disposition - Lesser Of:
Proceeds = $525,000 ($650,000 - $125,000)
Capital Cost = $545,000 ($625,000 - $80,000)

$478,695
( 525,000)

Negative Ending Balance = Recapture Of CCA

($ 46,305)

There is also a capital gain resulting from the sale of the land. However, the requirements of the problem are limited to CCA, recapture, and terminal losses.
Since the replacement building is new, used 100 percent for non-residential purposes and allocated to a separate Class 1, it qualifies for the 6 percent CCA rate. The CCA on the new building would be as follows:
Opening UCC Balance
Additions ($745,000 - $125,000)
One-Half Net Additions [(1/2)($620,000)]

Nil
$620,000
( 310,000)
$310,000
6%

Maximum 2011 CCA

$ 18,600

zle hz CCA Base
Rate

Class 8
The required calculation here would be as follows:

Opening Class 8 Balance
Additions
Disposals: Lesser Of:
Capital Cost = $56,000
Proceeds = $17,000
One-Half Net Additions [(1/2)($74,000 - $17,000)]

$243,000
74,000
(
(

17,000)
28,500)
$271,500
20%

Maximum 2011 CCA

$ 54,300

d

CCA Base
Rate

Class 10
The required calculations here would be as follows:
Opening UCC Balance And CCA Base
Rate

$126,000
30%

Maximum 2011 CCA

$ 37,800

Class 10.1
The Lexus would be allocated to a separate Class 10.1. The amount would be limited to
$30,000, resulting in maximum 2011 CCA of $4,500 [(1/2)(30%)($30,000)]. The kilometers driven for personal purposes would affect the taxable benefit, but does not affect the CCA.
Class 13
Class 13 is a straight-line class. In this case, the term of the lease and one renewal totals ten years, resulting in a 10 year write off. The maximum CCA for 2011 would be $15,000
($150,000 ÷ 10).

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Canadian Tax Principles 2011/2012 - Solutions Manual

Solution To AP Five - 7
Class 14
The limited life franchise would be allocated to Class 14 and amortized on a straight line basis over its legal life. The maximum 2011 CCA would be $7,750 ($62,000 ÷ 8). Note that the half-year rule is not applicable to Class 14.
CEC
The maximum deduction from the cumulative eligible capital account is calculated as follows: 2009 Addition [(3/4)($84,000)]
CEC Amount At 7 Percent

(

$63,000
4,410)

January 1, 2010 Balance
CEC Amount At 7 Percent

(

$58,590
4,101)

January 1, 2011 Balance
Disposal [(3/4)($65,000)]

$54,489
( 48,750)

Balance After Disposal
CEC Amount At 7 Percent

(

January 1, 2012 Balance (Not Required)

$ 5,739
402)
$ 5,337

zle hz Summary
The total maximum CCA and CEC write-off is calculated as follows:
Class 1
Class 8
Class 10
Class 10.1
Class 13
Class 14
CEC Amount

$ 18,600
54,300
37,800
4,500
15,000
7,750
402

Total CCA

$138,352

In addition, there is Class 1 recapture of $46,305.

d
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d

zle hz 74

Canadian Tax Principles 2011/2012 - Solutions Manual

Solution To AP Six - 1

CHAPTER SIX SOLUTIONS
Solution to Assignment Problem Six - 1
The results for 2011 and 2012 would be as follows:

Cash Sales
Sales On Account
Advances From Customers

2011

2012

$112,000
96,000
12,000

$146,000
123,000
16,000

Amounts Received And Receivable
$220,000
Add:
Prior Year Reserve For Undelivered Merchandise
Nil
Prior Year Reserve For Doubtful Debts
Nil
Deduct:
Current Year Reserve For Undelivered Merchandise ( 12,000)
Current Year Reserve For Doubtful Debts
( 11,000)
Actual Write-Offs
Nil
$197,000

12,000
11,000
(
(
(

16,000)
10,000)
13,000)
$269,000

d

zle hz Net Effect

$285,000

Canadian Tax Principles 2011/2012 - Solutions Manual

75

Solution To AP Six - 2

Solution to Assignment Problem Six - 2
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 realizable 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.

zle hz 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
150 Units At $125

$102,400
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
Average Cost [($493,900 ÷ 3,900)]

d

950 Units At Average Cost

950
126.64
$120,308

Lower Of Cost And Market - Four Possible Values
For tax purposes, the possible values here would be as follows:
Lower
Lower
Lower
Lower

Of
Of
Of
Of

Replacement Cost And FIFO Cost
Replacement Cost And Average Cost
Net Realizable Value And FIFO Cost
Net Realizable Value And Average Cost

$119,700
119,700
121,150
120,308

For accounting purposes, only the last two values would be acceptable.

76

Canadian Tax Principles 2011/2012 - Solutions Manual

Solution To AP Six - 3

Solution to Assignment Problem Six - 3
Part A
As the Honda Accord was sold during 2011, the Company would not be able to deduct CCA for that year. However, when the $25,000 proceeds of disposition is deducted from the
$24,650 UCC balance, the result would be recapture of $350 ($24,650 - $25,000). Note that, because the BMW cost more than $30,000, it would have to be allocated to a separate
Class 10.1. This means that its acquisition would not eliminate the recapture in Class 10.
The maximum CCA deduction on the BMW for the year ending December 31, 2011, would be calculated as follows:
Capital Cost (Limited To $30,000)
One-Half Net Additions

$30,000
( 15,000)

Balance For CCA Purposes
Rate

$15,000
30%

CCA For 2011

$ 4,500

The operating costs for both vehicles totaling $12,300 would be deductible.

zle hz Part B
The standby charge on the two vehicles would be calculated as follows:
Honda Accord [(2%)($29,000)(6)(8,000 ÷ 10,002)]
BMW Sedan [(2%)($105,000)(6)]

$ 2,783
12,600

Total Standby Charge

$15,383

Because the Honda was used primarily (more than 50 percent) for employment purposes, it is eligible for the reduced standby charge. This is not the case with the BMW sedan.
The operating cost benefit for 2011 would be calculated as follows:
Honda - Lesser Of:
• [($2,783)(1/2)] = $1,392
• [(8,000)($0.24)] = $1,920
BMW [(19,000)($0.24)]

d

Total Operating Cost Benefit

$1,392
4,560
$5,952

Here again, because the Honda was used primarily for business, it is eligible for the alternative operating cost benefit calculation.
The minimum total benefit would be:
Standby Charge
Operating Cost Benefit

$15,383
5,952

Minimum Total Benefit For 2011

$21,335

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77

Solution To AP Six - 4

Solution to Assignment Problem Six - 4
1. Costs of obtaining financing are generally deductible, and consequently the payment to the Brazilian consultant would be deductible. However, as a financing cost, it would have to be deducted over five years at a rate of $240 per year.
2. Donations to registered Canadian charities can be deducted in the calculation of a corporation’s Taxable Income. However, such contributions are not deductible in the calculation of Net Income For Tax Purposes. As business income is a component of Net
Income For Tax Purposes, the contributions cannot be deducted at this stage.
3. The cost of the option on the land is a capital expenditure and cannot be deducted in the calculation of business income. As a capital expenditure, it will be added to the cost of any land acquired or, alternatively, if the option expires without an acquisition of land, the $2,500 will likely be considered a capital loss.
4. The costs of incorporating cannot be deducted. Rather, they represent an eligible capital expenditure, three-quarters of which will be added to the cumulative eligible capital account and deducted from income at a rate of 7 percent of the declining balance.

zle hz 5. The cost of the franchise cannot be deducted during the current period. It is a capital expenditure that will be added to Class 14 and written off by the straight-line method over its 10 year life.
6. The landscaping costs are fully deductible as incurred. With respect to the cost of cancelling the lease, these amounts can only be deducted on a pro rata basis over the remaining term of the lease. The cost of the parking lot is a capital cost that will be added to Class 17
(miscellaneous assets including parking lots) and written off at a rate of 8 percent of the declining balance.
7. As the Company does not have legal title to the pedestrian bridge, it is not a capital asset.
However, it should not be viewed as a current expense and, as a consequence, three-quarters of the cost will probably be allocated to cumulative eligible capital and deducted from income at a rate of 7 percent of the declining balance.

d
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Canadian Tax Principles 2011/2012 - Solutions Manual

Solution To AP Six - 5

Solution to Assignment Problem Six - 5
The appropriate advice on each of the expenditures described in the problem would be as follows: 1. Both the insurance payments for coverage of her office and contents and for malpractice coverage would be deductible as business expenses. The life insurance premiums, unless the insurance was required to obtain financing, would not be deductible.
2. The payments to the collection agency are a legitimate cost of operating her practice and, as such, are deductible.
3. While the contributions to registered charities will qualify Dr. Sweet for a credit against
Tax Payable, they cannot be deducted in the computation of Net or Taxable Income for individuals. 4. Assuming that the salary being paid to Mr. Sweet is reasonable for the services being rendered by him, it can be deducted as a business expense.
5. The cost of the painting is not deductible. However, as it is a capital expenditure, Dr.
Sweet will be able to deduct CCA as permitted by the Income Tax Regulations.

zle hz 6. The convention costs related to Dr. Sweet’s attendance at the convention would be deductible. In most situations, the costs associated with an accompanying spouse would not be deductible. However, since Mr. Sweet is involved in Dr. Sweet’s business operation, it may be possible to demonstrate that there was a legitimate business purpose for having him attend the convention. If this demonstration can be accomplished, the expenses related to Mr. Sweet would also be deductible in these circumstances. Any deductible meal and entertainment expenditures would be subject to the 50 percent limit. 7. The membership fee of $1,000 would not be deductible. However, the payments for court time spent with patients would be deductible, subject to the 50 percent limitation that is applicable to business meals and entertainment costs. The deduction would be
$260 [(50%)(40%)($1,300)].

d

8. As Dr. Sweet was involved in fighting a reassessment, the accounting and legal fees would be deductible. However, the interest resulting from late payment of taxes would not be deductible. 9. As any winnings resulting from Dr. Sweet’s lottery ticket purchases would not be taxable, the cost of the lottery tickets is not deductible.

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79

Solution To AP Six - 6

Solution to Assignment Problem Six - 6
The minimum net business income of Fairway Distribution would be calculated as follows:
Accounting Income As Reported
$273,000
Additions:
Item 2 - Amortization
78,500
Item 3 - Cost Of Advertising In Foreign Newspaper (Note 1)
3,500
Item 3 - Donations To Charities (Note 2)
1,260
Item 3 - Cost Of Real Estate Appraisal (Note 3)
1,470
Item 3 - Cost Of Landscaping (Note 4)
5,260
Item 3 - Mrs. Fairway’s Management Fee (Note 5)
123,000
Subtotal
Deductions:
Item 1 - Bad Debt Expense Adjustment (Note 6)
Item 2 - CCA (Given)
Net Business Income

$485,990
(
4,200)
( 123,600)
$358,190

zle hz Note 1 In general, the cost of advertising in foreign media that is directed towards Canadian markets cannot be deducted for tax purposes. While there is an exception for foreign periodicals, it does not apply to foreign newspapers.
Note 2 Donations to charities cannot be deducted in the calculation of net business income. They will be the basis for a tax credit in the calculation of Tax Payable for Mr.
Fairway.
Note 3 The cost of appraising a capital asset for purposes of sale is not deductible.
Rather, it is an addition to the capital cost of the appraised asset.
Note 4 While landscaping costs related to business properties are deductible when incurred, the cost of improving non-business personal use property would not be.
Note 5 ITA 67 requires that business expenses be “reasonable in the circumstances”. As
Mrs. Fairway does not appear to do any work for the business, it would be difficult to view her management fee as reasonable. As a consequence, it would not be deductible.

d

Note 6

For tax purposes, the bad debt adjustment would be calculated as follows:
Last Year’s Reserve
Actual Write-Offs
This Year’s Reserve

$15,000
( 17,500)
( 19,200)

Total Deduction For Tax Purposes
Accounting Deduction (Actual Write-Offs)

($21,700)
17,500

Bad Debt Expense Adjustment

($ 4,200)

As $4,200 ($21,700 - $17,500) more than the amount that was written off for accounting purposes can be deducted for tax purposes, an adjustment is required. Note that the accounting procedures that were used in this case are not consistent with GAAP.

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Canadian Tax Principles 2011/2012 - Solutions Manual

Solution To AP Six - 7

Solution to Assignment Problem Six - 7
The minimum net business income of Morton Forms would be calculated as follows:
Accounting Income
Additions:
Amortization Expense
Reserve For Inventory Obsolescence
Cost Of Advertising On A Foreign Television
Station To The Canadian Market (Note 1)
Unused Advertising Circulars
[(3/4)($12,400)] (Note 2)
Business Meals And Entertainment Non-Deductible 50 Percent
Charitable Donations (Note 3)
Appraisal Costs On Land To Be Sold (Note 4)

$193,200
$69,300
15,000
9,600
9,300
11,000
31,900
4,200

150,300
$343,500

Deductions:
Landscaping Costs
CCA

($18,900)
( 94,200)

zle hz Net Business income

(

113,100)
$230,400

Note 1 In general, when a Canadian enterprise places advertising directed at the
Canadian market in foreign print or broadcast media, the costs of the advertising are not deductible. ITA 19.01 exempts certain foreign periodicals from this rule.
However, the rule is still applicable to foreign broadcast media.
Note 2 As noted in ITA 10(4)(b), items such as advertising circulars would be viewed as a form of inventory. As we do not have information on market value for these items, they would have to be valued at cost.
Note 3 Donations to charities cannot be deducted in the calculation of net business income. They will be the basis for a tax credit in the calculation of Tax Payable for Ms.
Morton.
Note 4 The appraisal costs on land to be sold must be added to the adjusted cost base of the asset.

d

Other Items Further explanation related to the items not included in the preceding calculation of Net Business Income are as follows:
Baseball Sponsorship

This would be deductible as a promotional 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.
Mortgage Interest The interest would be deductible as the building is a capital asset of the business.
Damages As the damages relate to a transaction that produces business income, they are considered a business expense.
Fees Paid To Grandson Since the fees paid to Ms. Morton’s grandson are reasonable when compared to those charged by a non-arm’s length party, they are deductible. Canadian Tax Principles 2011/2012 - Solutions Manual

81

Solution To AP Six - 8

Solution to Assignment Problem Six - 8
Part A
Each partner’s share of partnership profits is considered personal income of each partner.
Usually, partnership income is allocated to each partner based on their respective partnership interest. Part B
The basic rules of ITA 249.1(1) require that, in general, a partnership with members who are individuals use a December 31 fiscal year end. While ITA 249.1(4) allows a partnership to elect a fiscal year end other than December 31, this election requires complex adjustments for Additional Business Income that may or may not be worthwhile.
Part C
This question requires an analysis of whether the arrangement with the outside consultants is one of employment. If the outside consultants are considered employees, source deductions will be required. In making this decision, the overriding consideration is the intent of the involved parties. Factors that can be considered in determining this intent include the following: zle hz Control It does not appear that the partnership will exercise a significant amount of control over the outside consultants on how and when the work will be done. The outside consultants would be free to accept or reject work from the partnership and work for others.
Ownership Of Tools And Equipment Consulting projects do not require tools or equipment in the usual sense of these terms. Any laptop or computer used in doing the work would undoubtedly be owned by the outside consultant. Although not stated in the problem, it does not appear that the outside consultant would be working in space provided by Richmond Consultants.
Ability To Subcontract Or Hire Assistants It is not clear whether the outside consultants would have the right to subcontract or hire assistants. Determining this could be important to the analysis.

d

Financial Risk Since the work is done for a set fee and related expenses are reimbursed, there is no financial risk for the outside consultants.
Responsibility For Investment And Management It would appear that the outside consultants are responsible for any management of the projects that is required.
Opportunity For Profit Since the work is done for a set fee, the outside consultant cannot increase the proceeds and hence the profit from a project. Since expenses are reimbursed, decreasing expenses would not increase profit from a project. As a result, it does not appear that a profit could arise.
In addition to these factors, the contracts would be for a specific project, not work as part of an ongoing relationship.
This analysis would suggest that the arrangements with the outside consultants are contracts for service, not contracts of employment. Given this, source deductions would not be required. 82

Canadian Tax Principles 2011/2012 - Solutions Manual

Solution To AP Six - 9

Solution to Assignment Problem Six - 9
Carla’s minimum net business income for the year ending December 31, 2011 can be calculated as follows:
Carla Jensen
Statement Of Business Income
For Year Ending December 31, 2011
Revenue Collected
Increase In Billed Receivables ($42,000 - $37,000)

$105,000
5,000

Total Revenue (Note 1)

$110,000

Building Operating Costs
Vehicle Operating Costs
Payments To Assistants
Miscellaneous Office Costs
Business Meals [(50%)($4,200)]
CCA (Note 2)
Terminal Loss For Class 10 (Note 3)
CEC (Note 4)

$ 24,500
7,200
13,500
3,750
2,100
27,823
4,955
2,468

Total Expenses

$ 86,296

zle hz Net Business Income

$ 23,704

Note 1 As Carla is a professional accountant she is eligible for the special rule under ITA 34 which allows her to recognize revenue on a billed basis. This means that she does not have to include her unbilled work-in-progress in her Net Income For Tax Purposes.
Note 2

CCA amounts are calculated as follows:

Class 1 As the building is used 100 percent for non-residential purposes, it is eligible for the increased rate of 6 percent. This means that the maximum CCA for
2011 would be:
Class 1 [($226,000)(6%)]
Class 8

$13,560

The required calculations are as follows:

d

Opening Balance
Additions
Disposal - Lesser Of:
• Proceeds = $6,000
• Cost = $18,000
One-Half Net Additions

$46,500

$34,000

(

6,000)

28,000
( 14,000)

CCA Base
Rate

$60,500
20%

Class 8

$12,100

Total CCA
Class
Class
Class
Class

The total CCA deductible would be as follows:

1 (Preceding Calculation)
8 (Preceding Calculation)
52 (100% write-off)
12 [($725)(1/2)(100%)]

Total CCA

Canadian Tax Principles 2011/2012 - Solutions Manual

$13,560
12,100
1,800
363
$27,823

83

Solution To AP Six - 9
Note 3 As the only vehicle used by the business was disposed of during 2011, there is no
CCA for Class 10. However, as there is a balance left in the Class, there would be a terminal loss of $4,955 ($17,255 - $12,300).
Note 4 Three-quarters of the $47,000 cost of the client list would be allocated to Cumulative Eligible Capital. The CEC deduction for 2011 would be $2,468 [($47,000)(3/4)(7%)].
Note 5 The car leasing costs would be wholly deductible as the monthly lease charge and the manufacturer’s list price are within the limits.

d

zle hz 84

Canadian Tax Principles 2011/2012 - Solutions Manual

Solution To AP Six - 10

Solution to Assignment Problem Six - 10
Part A - No Election
If the ITA 22 election is not made, the tax consequences for George Pentel would be as follows: Add: 2010 Reserve For Doubtful Debts

$12,000

2011 Income Inclusion

$12,000

While George has a capital loss of $8,500 [(1/2)($352,000 - $335,000)], he will not be able to deduct this amount as he has had no capital gains in the previous three years and does not expect to have any in the current or subsequent years.
If the ITA 22 election is not made, the tax consequences to Molly Stone would be as follows:
Proceeds Of Disposition (Amount Collected)
Adjusted Cost Base

$337,000
( 335,000)

Capital Gain
Non-Taxable One-Half

(

2011 Income Inclusion

$

2,000
1,000)

$

1,000

zle hz Part A - Election
If the ITA 22 election is made, the tax consequences for George would be as follows:
Add: 2010 Reserve For Doubtful Debts
Deduct: Business Loss ($352,000 - $335,000)

$12,000
( 17,000)

2011 Deduction From Income

($ 5,000)

If the ITA 22 election is made, the tax consequences to Molly Stone would be as follows:
Add: Face Value - Price Paid ($352,000 - $335,000)
Deduct: Actual Write-Offs ($352,000 - $337,000)
2011 Income Inclusion

$17,000
( 15,000)
$ 2,000

d

Part B
For George Pentel, the ITA 22 election is clearly desirable, converting a $12,000 income inclusion into a $5,000 deduction.
For Molly Stone, the fact that actual collections ($337,000) exceed the estimated value of the
Accounts Receivable on the date of the sale ($335,000), means that the ITA 22 election would not be desirable. It would double her income inclusion from $1,000 to $2,000.

Canadian Tax Principles 2011/2012 - Solutions Manual

85

Solution To AP Six - 11

Solution to Assignment Problem Six - 11
Part A
Under ITA 18(12), the following conditions must be satisfied in order for expenses related to work space in a self-contained domestic establishment to be deductible:
·

the work space is either the individual’s principal place of business; or

·

the work space is used exclusively for the purpose of earning income from business and is used on a regular and continuous basis for meeting clients, customers, or patients of the individual in respect of the business.

With respect to Mr. Larson’s mail order business, the allocated space in his home would appear to be his principal place of business. This means that he would be able to deduct home office costs in determining his net business income.

Part B
The calculation of the minimum net business income to be reported in Mr. Larson’s personal tax return is as follows:
$182,000
($98,000)
( 2,400)
( 4,600)
(
560)
( 1,100)
(
420)
( 3,272)

zle hz Revenues
Less: Expenses Other Than Home Office:
Cost Of Merchandise Sold
Packaging Materials
Shipping Costs
Miscellaneous Office Supplies
Telephone
Printing Of Posters And Brochures
CCA (Note 1)
Income Before Home Office Costs
Less: Home Office Costs (Note 2)

( 110,352)
(

Net Business Income

$ 71,648
4,332)
$ 67,316

Note 1 Maximum CCA amounts on the assets of the business (not including CCA on the house) for the short fiscal year would be calculated as follows (alternative calculations shown in the two columns):
Short Fiscal Year
(335/365)

$1,850
1,430
285

$1,698
1,312
262

d
100%

Class 8 [($18,500)(1/2)(20%)]
Class 52 [($1,430)(100%) - no first year rule]
Class 12 [($570)(1/2)(100%)]
Total
Short Fiscal Year Factor
Maximum 2011 CCA

86

$3,565
335/365
$3,272

$3,272

Canadian Tax Principles 2011/2012 - Solutions Manual

Solution To AP Six - 11
Note 2

The home office costs would be calculated as follows:
Utilities For Home (Heat, Light, And Water)
Mortgage Interest Paid
House Insurance
Property Taxes
Repairs And Maintenance For Home

$ 3,200
10,100
500
4,300
2,600

Total
Class 1 CCA [($426,000 - $150,000)(1/2)(4%)]

$20,700
5,520

Total Costs For The Home
Percentage Of Floor Space

$26,220
18%

Subtotal
Short Fiscal Year Factor

$ 4,720
335/365

Deductible Home Office Costs

$ 4,332

Part C
There are a few of issues that should be discussed with Mr. Larson.
As this problem asks for “minimum” net business income, CCA must be deducted on Mr.
Larson’s home. The problem with this is that, if he takes CCA, it could jeopardize the principal residence exemption on this property, resulting in the payment of taxes on a portion of the taxable capital gain that might arise on any future sale of the property. This is discussed in more detail in Chapter 8.

·

Although it is not relevant for this year, Mr. Larson should be aware that the deduction of home office costs cannot be used to create a loss in the future. However, any amount not deductible because it is greater than his income can be deducted in any subsequent year provided there is sufficient income from the same business in that year. This provides for an unlimited carry forward of unused home office costs (see IT-514, Work Space in Home
Expenses).

d

zle hz ·

Canadian Tax Principles 2011/2012 - Solutions Manual

87

Solution To AP Six - 12

Solution to Assignment Problem Six - 12
Net Employment Income
The Net Employment Income component of Net Income For Tax Purposes would be calculated as follows:
Salary
Commissions
RPP Contributions
Automobile Benefit (Note 1)
Travel Allowance (Note 2)
Art Course Tuition (Note 3)
Cash Gift (Note 4)
Stock Option Benefit [(1,500)($61 - $52)]

$ 89,000
12,000
( 3,750)
1,140
Nil
600
400
13,500

Net Employment Income

$112,890

Note 1 The automobile benefit would be calculated as follows:

zle hz Standby Charge [(2/3)($5,508)(11/12)][8,500 ÷ 18,337]
Operating Cost Benefit - Lesser Of:
• [($0.24)(8,500)] = $2,040
• ($1,560 ÷ 2) = $780
Total Benefit Before Repayment
Repayment
Automobile Benefit

$1,560
780
$2,340
( 1,200)
$1,140

Note 2 As the travel allowance appears to be reasonable given his actual costs, it does not have to be included in Mr. Bowles’ income and it is more advantageous for him not to do so. Correspondingly, he cannot deduct the travel costs incurred.
Note 3 Tuition for the marketing course would appear to be employment related and, as a consequence, would not be included in Mr. Bowles’ employment income.
Note 4 While the non-cash gift for years of service does not have to be included in income, the $400 gift certificate, i.e. near cash gift, must be included.

d

Net Business Income
The Net Business Income component of Net Income For Tax Purposes would be calculated as follows: Amounts Billed
Unbilled Work In Progress (Note 5)

$41,750
8,500

Total Inclusions
Deductions:
Office Rent (12 Months At $500)
CCA (Note 6)
Part Time Assistant
Office Supplies
Monthly Telephone Service
Cell Phone Charges
Meals And Entertainment [(1/2)($3,150)]

$50,250

Net Business Income

($6,000)
( 3,768)
( 5,725)
(
347)
(
312)
(
211)
( 1,575)

( 17,938)
$32,312

Note 5 While some professionals can elect under ITA 34 to use the billed basis for recognizing revenue, this approach is not available to management consultants.

88

Canadian Tax Principles 2011/2012 - Solutions Manual

Solution To AP Six - 12
Note 6 Maximum CCA would be calculated as follows:
Class
Class
Class
Class

13 [(1/2)($12,000 ÷ 5*)]
8 [(1/2)(20%)($10,000)]
52 [(100%)($1,150)]
12 [(1/2)(100%)($836)]

$1,200
1,000
1,150
418

Total

$3,768

*With respect to the Class 13 amount, this is a straight line Class and it is subject to the half year rules. While the term of the lease is only three years, the deductible amount is the lesser of the capital cost divided by the term of the lease and one-fifth of the capital cost. In this case, the deduction is limited to one-half of one-fifth of the capital cost. Net Income For Tax Purposes And Taxable Income
Mr. Bowles has Net Income For Tax Purposes and Taxable Income as follows:
Net Employment Income
Net Business Income

$112,890
32,312

zle hz Net Income For Tax Purposes
Stock Option Deduction [($13,500)(1/2)]

(

Taxable Income

$145,202
6,750)
$138,452

Federal Tax Payable
The required calculations are as follows:

$27,256
2,799

Tax Before Credits
Tax Credits:
Basic Personal Amount
($10,527)
Spouse ($10,527 - $3,450)
( 7,077)
Child (Marie)
( 2,131)
EI Premiums
(
787)
CPP Contributions
( 2,218)
Canada Employment
( 1,065)
Tuition Credit - Mr. Bowles (Note 7)
(
600)
Transfer Of Tuition, Education And Textbook - Lesser Of:
• $5,000
• [$9,800 + (8)($400) + (8)($65)]] = $13,520
( 5,000)
Medical Expenses (Note 8)
( 10,438)
Child Fitness Credit - Lesser Of:
• $500
• $1,800
(
500)

$30,055

d

Tax On First $128,800
Tax On Next $9,652 ($138,452 - $128,800) At 29 Percent

Total Credit Base
Rate
Charitable Donations
[(15%)($200) + (29%)($1,425 - $200)]
Political Contributions [(3/4)($275)]
Federal Tax Payable

Canadian Tax Principles 2011/2012 - Solutions Manual

($40,343)
15%

(

6,051)

(
(

385)
206)
$23,413

89

Solution To AP Six - 12
Note 7 As Mr. Bowles included the reimbursement of the art course in his employment income as a taxable benefit, he can claim the tuition fee credit. As the course was only for two days, he would not be eligible for the part-time education or textbook credit.
Note 8

The amount of medical expenses that can be included is calculated as follows:

Medical Expenses For Martin, Sally, And Marie
($2,500 + $1,850 + $1,600)
Lesser Of:
• [[(3%)($145,202)] = $4,356
• 2011 Threshold Amount = $2,052

( 2,052)

Balance Before Dependants 18 And Over

$ 3,898

Ellen’s Medical Expenses
Reduced By The Lesser Of:
• $2,052
• [(3%)(Nil)] = Nil

$5,950

$6,540
Nil

Total Medical Expense Claim

6,540
$10,438

d

zle hz Prior to 2011, medical expenses claimed for an adult dependant were limited to an absolute amount of $10,000. The March 22, 2011 budget proposes the elimination of this constraint.

90

Canadian Tax Principles 2011/2012 - Solutions Manual

Solution To AP Six - 13

Solution to Assignment Problem Six - 13
Net Income For Tax Purposes
The required calculations here are as follows:
Salary
Commissions
RPP Contributions
Car Allowance [($600)(12)]
Hotel And Meal Allowance
Car Operating Costs [($6,800)(32,500 ÷ 38,000)]
Car CCA [($30,000)(30%)(1/2)(32,500 ÷ 38,000)]
Stock Option Benefit [($9.50 - $4.25)(2,200)]

$ 84,000
39,000
(
5,600)
7,200
Nil
(
5,816)
(
3,849)
11,550

Net Employment Income

$126,485

Ms. Arden received an allowance $13,200 [(12)($1,100)] to cover the costs of hotels and meals. As her actual costs are $13,900 ($7,700 + $6,200), this allowance appears to be reasonable. Given this, it does not have to be included in income. As the allowance is not included in Ms. Arden’s income, she cannot deduct her actual costs. zle hz As it is not deductible for tax purposes, the amount withheld for parking has no effect on Ms. Arden’s employment income.
Cash Basis Income (Given)
December 31 Receivables
December 31 Inventories
December 31 Payables
CCA On Building [($272,000 - $78,000)(6%)(1/2)]*
CCA On Furniture And Fixtures [($48,000)(20%)(1/2)]

$56,500
5,200
18,700
( 8,240)
( 5,820)
( 4,800)

Net Business Income

$61,540

*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

d

Net Employment Income
Net Business Income

$126,485
61,540
$188,025

Taxable Income
The required calculation is as follows:
Net Income For Tax Purposes
Stock Option Deduction [($11,550)(1/2)]
Taxable Income

(

$188,025
5,775)
$182,250

Tax Payable
The required calculations are as follows:

Canadian Tax Principles 2011/2012 - Solutions Manual

91

Solution To AP Six - 13
Tax On First $128,800
Tax On Next $53,450 ($182,250 - $128,800) At 29 Percent

$27,256
15,501

Tax Before Credits
Tax Credits:
Basic Personal Amount (Ms. Arden)
($10,527)
Common-Law Partner ($10,527 - $9,800)
(
727)
Caregiver (Helen - income below threshold)
( 4,282)
EI
(
787)
CPP
( 2,218)
Canada Employment
( 1,065)
Transfer Of Tuition, Education And Textbook - Lesser Of:
• $5,000
( 5,000)
• [$7,200 + (7)($400) + (7)($65)] = $10,455
Medical Expenses (See Note)
( 12,440)

$42,757

Total Credit Base
Rate

($37,046)
15%

Charitable Contributions [(15%)($200) + (29%)($1,200 - $200)]
Federal Tax Payable

(

5,557)

(

320)
$36,880

zle hz Note The medical expense credit base would be calculated as follows:
Medical Expenses For Ms. Arden And Maria
($3,940 + $2,450)
Lesser Of:
• [[(3%)($188,025)] = $5,641
• 2011 Threshold Amount = $2,052

$ 6,390
( 2,052)

Balance Before Dependants 18 And Over
Helen’s Medical Expenses
Reduced By The Lesser Of:
• $2,052
• [(3%)($7,200)] = $216

Total Medical Expense Claim

$7,250

(

216)

7,034

$1,260

d

Jeff’s Medical Expenses
Reduced By The Lesser Of:
• $2,052
• [(3%)($6,400)] = $192

$ 4,338

(

192)

1,068
$12,440

Prior to 2011, medical expenses claimed for an adult dependant were limited to an absolute amount of $10,000. The March 22, 2011 budget proposes the elimination of this constraint.

92

Canadian Tax Principles 2011/2012 - Solutions Manual

Solution To AP Tax Software Chapter 6

Solution to Problem For Tax Software Chapter 6
This solution includes selected schedules and worksheets from the ProFile T1 return.
Note that the program can only be used to calculate 2010 (not 2011) tax returns and the problem and solution reflect this fact.
The tax return is available on the Instructor’s Resource CD-ROM under the heading
“Tax Software Assignment Problems”. The ProFile version contains the complete return. The .PDF version contains only the schedules required in the problem.
·

To view the .PDF file that contains the required schedules, select the file “PDF
Software Problem Chapter 6” from the PDF Format drop-down list.

·

To view the ProFile file of the complete tax return, select the file “Software
Problem Chapter 6” from the ProFile Format drop-down list.

For more information on how to use the ProFile tax program, please refer to the sample tax returns in the Study Guide.
Since the course at Dalhousie did not have any relevance to Seymour’s work, he does not have the option of deducting the course fees or travel to the University as a business expense.

zle hz When inputting the T4A for Seymour, it should be entered as a contract payment that will be carried forward to the T2125.
The installation of the new gas furnace is not deductible as a house cost. It should be capitalized and will increase the capital cost of the house. The life insurance premiums on the mortgage are not deductible as house costs as the mortgagee does not require life insurance.
The payments on principal are not deductible.
The interest on the late property taxes is included in the deductible home office costs as part of the property taxes paid.
To enter the interest paid on the car loan, the commencement and termination dates for the interest must be input. The loan has been outstanding since the car was purchased on
February 15, 2007, and will be paid back after four years. The deductible auto interest costs limit of $10 per day is not relevant as the loan was outstanding for the year. As a result, all of the interest paid is included in the calculation of deductible interest.

d

The CCA on the car of $1,116.23 [(30%)($15,470)(8,412 km ÷ 34,975 km)] is deducted as part of the total CCA on line 9936 of the T2125. Note that the CCA for Class 10.1 on the
T2125 CCA Summary is only the deductible portion of $1,116.23. The maximum CCA of
$4,641 [(30%)($15,470 UCC)] has been adjusted by the portion of business usage from the
T2125CCA form for the car.
Although the donations credit and the child tax credit can be claimed by either spouse, since both Mary and Seymour have amounts owing , the tax savings will be the same. They have been left on Mary ’s return.

Canadian Tax Principles 2011/2012 - Solutions Manual

93

Solution To AP Tax Software Chapter 6
Changes to the Summary form from the previous version, excluding calculated amounts other than Balance Owing (Refund).
Summary Line Changed

Mary

Seymour

Chapter 6
Self-employment

46,484

CPP (deduction from Net Income)

2,128

Spouse credit

( 10,382)

Basic Personal Amount

10,382

CPP tax credit

2,128

Education related tax credits

3,595

CPP contributions payable

4,255

Balance Owing (Refund)

308

11,779

d

zle hz 94

Canadian Tax Principles 2011/2012 - Solutions Manual

Tax Software Assignment Problem - Chapter 6
Walford, Mary-Chap 6P SIN: 527 000 129

Summary

2010 Tax Summary (Federal)
Mary-Chap 6P

Total income
Employment *
Old Age Security
CPP/QPP benefits
Other pensions
Split-pension amount
Universal Child Care Benefit
Employment Insurance
Taxable dividends
Interest
Limited partnership
RDSP
Rental
Taxable capital gains
Support payments
RRSP
Other
Self-employment *
Workers' compensation and social assistance

101
113
114
115
116
117
119
120
121
122
125
126
127
128
129
130
135

147
Total income 150
207
208
210
212
213
214
215
217
219
220
221
222
224
229
235
231
Net income 236

152,866

Total payable
Federal tax
Non-refundable tax credits
Dividend tax credit
Min. tax carry-over/other *

404
350
425
426
Basic federal tax 429

2011 Estimated
GST/HST credit
Child Tax Benefit
RRSP contribution limit
More than one line is considered

Seymour-Chap 6P

10,382

10,382

2,101
2,911
1,051

2,128

3,595
16,445
2,467
480
2,946

16,105
2,416

34,375
2,946

6,891
2,416

31,429

4,475

31,429

4,475

31,429

4,475
4,255

17,544
48,973

3,049
11,779

2,416

Non resident surtax
Foreign tax credits / other

405
406
410
414
417
415
418
Net federal tax 420
CPP contributions payable
421
44,356 EI self-employment
430
Social benefits repayment
422
Provincial/territorial tax
428
Total payable 435
Federal tax
Political/inv. tax credit/other *
Labour-sponsored tax credit
2,128 Alternative minimum tax
WITB Prepayment (RC210)
Additional tax on RESP

152,866

244
248
249
250
251
254
255
256
Taxable income 260

*

300
301
303
367
306
308
363
364
365
369
313
314
316
318
319
323
332
Subtotal 335
338
Credit at 15%
46,484 Donations and gifts
349
Non-refundable tax credits 350

d

Taxable income
Canadian Forces personnel
Home relocation loan
Security options deductions
Other payments deduction
Losses of other years *
Capital gains deduction
Northern residents
Additional deductions

152,866

Mary-Chap 6P

Non-refundable tax credits
Basic personal amount
Age amount
Spouse / eligible dependant *
Amount for children
Infirm/caregiver *
CPP/QPP/PPIP/EI *
Canada employment amount
Public transit passes amount
Children's fitness amount
Home buyers/Home renovation *
Adoption expenses
Pension income amount
Disability amount
Transfers *
Interest on student loans
Tuition / education
46,484 Medical expenses

zle hz Net income
RPP
RRSP *
Split-Pension Deduction
Union and professional dues
UCCB repayment
Child care expenses
Disability supports deduction
Business investment loss
Moving expenses
Support payments
Carrying charges and interest
CPP/QPP/PIPP *
Exploration and development
Employment expenses
Social benefits repayment
Other deductions *

Seymour-Chap 6P

Total credits
Income tax deducted *
QC or YT abatement *
CPP/EI overpayment *
Medical expense supplement
WITB (Schedule 6)
152,866
44,356 Other credits *
GST/HST rebate
Mary-Chap 6P
Seymour-Chap 6P
Instalments
Provincial tax credits
Total credits

22,450 00

8,366

Balance owing (refund)
Combined balance (refund)

437
440
448
452
453
454
457
476
479
482

48,665

48,665
308

11,779

12,087

Complete Return Available On Instructor's CD-ROM
95

Page 1 of 1

Tax Software Assignment Problem - Chapter 6
Gravel, Seymour-Chap 6P SIN: 527 000 079
Canada Revenue
Agency

Agence du revenu du Canada

Statement of
Business or Professional Activities

Identification
Your name Gravel, Seymour-Chap 6P
Business Name
Crystal Clear Communications
Business address
126 Prince William Street

2
Your social insurance number
527 000 079
Account Number
(15 characters)
_____ ____ RT ____
City, province or territory
Postal code
Saint John
E2L 4H9
NB
Was 2010 your last year of business? Yes
No X

Fiscal Period
From:
Year/Month/Day
Year/Month/Day
2010-01-01
Calendar Year to: 2010-12-31
Main product or service
Writing and editing
Tax shelter identification number
TS______

Partnership Business Number
(9 digits)
_________

Industry code
711510
(see the appendix in Guide T4002,
Business and Professional Income)
Your percentage of the partnership
100.0000 %

Name and address of person or firm preparing this form

Part 1 – Business income
If you have business income, tick this box and complete this part. Do not complete parts 1 and 2 on the same form.

Type of income

zle hz 2.

Business

Commission

Sales, commissions, or fees
Income reported on T4 slips
Income reported on T4A slips

A

Minus
Goods and services tax and provincial sales tax (GST and PST) or harmonized sales tax (HST) (if included in sales above)
Returns, allowances, and discounts (if included in sales above)
Total of the above two lines
Adjusted gross sales (line A minus line B) (enter this amount on line 8000 in below)

B
C

Part 2 – Professional income

3. X If you have professional income, tick this box and complete this part. Do not complete parts 1 and 2 on the same form.
Professional fees (includes work-in-progress)
Income reported on T4A slips

d

Minus
Goods and services tax and provincial sales tax (GST and PST) or harmonized sales tax (HST) (if included in fees above)
Work-in-progress (WIP), end of the year, per election to exclude WIP
(see Chapter 2 of the guide)
Total of the above two lines
Subtotal (line D minus line E)
Plus
Work-in-progress (WIP), start of the year, per election to exclude WIP (see Chapter 2 of the guide)
Adjusted professional fees (total of the above two lines) (enter this amount on line 8000 in Part 3, below)

41,603 17
20,000 00
61,603 17 D

E
61,603 17

61,603 17 F

T2125 E (10)

96

Page 1 of 3

Tax Software Assignment Problem - Chapter 6
Gravel, Seymour-Chap 6P SIN: 527 000 079

Crystal Clear Communications

Part 3 – Gross business or professional income
Adjusted gross sales (from line C in Part 1) or adjusted professional fees (from line F in Part 2)
Plus
Reserves deducted last year

8000

61,603 17 G

8290

Recapture of CCA and CEC
Other income

8230
Total of the above lines

H

8299
61,603 17
Gross business or professional income (line G plus line H)
Enter this amount on the appropriate line of your income tax and benefit return: business on line 162, professional on line 164, or commission on line 166
If GST/HST has been remitted and/or an input tax credit has been claimed, do not include GST/HST in the calculation of cost of goods sold, expenses or net income (loss) in parts 4 to 6.

Part 4 – Cost of goods sold and gross profit
If you have business income, complete this part. Enter only the business part of the costs.
Gross business income from line 8299 in Part 3

I

zle hz 8300
Opening inventory (include raw materials, goods in process, and finished goods)
Purchases during the year (net of returns, allowances, and discounts)
8320
Direct wage costs
8340
Subcontracts
8360
Other costs
8450
Total of the above five lines
Minus
8500
Closing inventory (include raw materials, goods in process, and finished goods)
Cost of goods sold 8518
Gross profit (line I minus line J)

J
8519

Part 5 – Net income (loss) before adjustments

Gross profit from line 8519 in Part 4 above, or gross income from line 8299 in Part 3

61,603 17 K
8521
8523
8590
8690
8710
8760
8810
8811
8860
8871
8910
8960
9060
9180
9200
9220
9224
9275

d

Expenses (enter only the business part)
Advertising
Meals and entertainment
1,494 26 x 50%
Meals and entertainment (long haul truck drivers) x 75%
Bad debts
Insurance
Interest
Business tax, fees, licences, dues, memberships, and subscriptions
Office expenses
Supplies
Legal, accounting, and other professional fees
Management and administration fees
Rent
Maintenance and repairs
Salaries, wages, and benefits (including employer's contributions)
Property taxes
Travel (including transportation fees, accomodations, and allowable part of meals)
Telephone and utilities
Fuel costs (except for motor vehicles)
Delivery, freight, and express
Motor vehicle expenses (not including CCA)
1,396 21
(see Chart A) - from worksheet
Motor vehicle expenses (not including CCA)
(see Chart A) - other
Allowance on eligible capital property
Capital cost allowance (from Area A)
Bank service charges
156 20

747 13
126 16
231 00
2,982 17
500 00

1,767 88
1,063 13
110 00

9281
9935
9936

1,396 21

Other expenses
=
156 20 9270
Total business expenses 9368
Net income (loss) before adjustments (line K minus line L)

156 20
13,176 75

T2125 E (10)

97

4,096 87

9369

13,176 75 L
48,426 42
Page 2 of 3

Tax Software Assignment Problem - Chapter 6
Gravel, Seymour-Chap 6P SIN: 527 000 079

Crystal Clear Communications

Part 6 – Your net Income (loss)
Your share of the amount on line 9369 in Part 5 above
48,426 42 M
9974
N
Plus : GST/HST rebate for partners received in the year (see Chapter 3)
48,426 42
48,426 42
Total (line M plus line N)
Minus - Other amounts deductible from your share of net partnership income (loss)
(from the chart on page 3)
9943
48,426 42
Net income (loss) after adjustments (line O minus line P)
9945
1,942 55
Minus - Business-use-of-home expenses (from the chart on page 3)
9946
46,483 87
Your net income (loss) (line Q minus line R)
Enter this amount on the appropriate line of your income tax and benefit return: business on line 135, professional on line 137, or commission on line 139
Other amounts deductible from your share of net partnership income (loss )
Claim expenses you incurred that were not included in the partnership statement of income and expenses, and for which the partnership did not reimburse you.

O
P
Q
R

Other amounts deductible from your share of the partnership
(total of the above lines) (enter this amount on line 9943, in Part 6)
Calculation of business-use-of-home expenses
Area of home used for business
Total area of home
Heat
Electricity
Insurance
Maintenance
Mortgage interest
Property taxes

zle hz Minus - Personal-use part

(A)
(B)

160
1,500
1,712 86
1,641 18
757 55
2,988 05
8,456 22
2,655 53
Subtotal

18,211 39
16,268 84
1,942 55

Subtotal

Plus - Amount carried forward from previous year

Subtotal
Minus - Net income (loss) after adjustments (from line Q in Part 6) (If negative, enter "0")
Business-use-of-home expenses available to carry forward (line 1 minus line 2) (If negative, enter "0")
Allowable claim (the lesser of amounts 1 or 2 above) (Enter this amount on line 9945 in Part 6)
Details of other partners
Spouse's first name
Last name
Mary-Chap 6P
Walford
Address:
126 Prince William Street Saint John, New Brunswick E2L 4H9
Partner's first name
Last name

Address:
Partner's first name
Address:
Partner's first name
Address:
Partner's first name

Last name

SIN
___ ___ ___

Last name

SIN
___ ___ ___

Last name

SIN
___ ___ ___

Last name

SIN
___ ___ ___

Address:
Details of equity
Total business liabilities
Drawings in 2010
Capital contributions in 2010

T2125 E (10)

SIN
___ ___ ___

d

Address:
Partner's first name

SIN
527 000 129

1,942 55 1
48,426 42 2
1,942 55

% of partnership
$ share

%
0.00

% of partnership
$ share

%

% of partnership
$ share

%

% of partnership
$ share

%

% of partnership
$ share

%

% of partnership
$ share

%

9931
9932
9933

98

Page 3 of 3

Tax Software Assignment Problem - Chapter 6
Gravel, Seymour-Chap 6P SIN: 527 000 079

Crystal Clear Communications

Area A - Calculation of capital cost allowance (CCA) claim
1
2
3
4
5*
6
7
Class Undepreciated
Cost of
Proceeds of
UCC after Adjustment for Base amount capital cost additions in the dispositions in additions and current-year for CCA
(UCC) at the year (Areas B the year (Areas dispositions additions (1/2
(col 5 - 6) start of year and C)
D and E)
(col 2 + 3 - 4) x (col 3 - 4))
8
10.1
12
52

2,254.94
15,470.00
219.15

8
Rate
%

2,254.94
2,254.94
20
15,470.00
15,470.00
30
525.00
744.15
262.50
481.65
100
2,048.00
2,048.00
2,048.00
100
Total CCA claim for the year (enter this amount, minus any personal part and any
CCA for business-use-of-home expenses, on line 9936 in Part 5**)

10
9
CCA
UCC at the end of the year for the year
(col 5 - 9)
(col 7 x 8 or an adjusted amount) 450.99
1,803.95
1,116.23
10,829.00
481.65
262.50
2,048.00
4,096.87

* If you have a negative amount in this column, add it to income as a recapture on line 8230, "Other income", in Part 3. If no property is left in the class and there is a positive amount in the column, deduct the amount from income as a terminal loss on line 9270, "Other expenses", in Part 5. Recapture and terminal loss do not apply to a Class 10.1 property. For more information, read Chapter 4 of Guide T4002, Business and Professional Income.
** For information on CCA for "Calculation of business-use-of-home expenses", see "Special Situations" in Chapter 4 pf the Guide T4002,
Business and Professional Income.

Area B - Details of equipment additions in the year
2
Property details

3
Total cost

4
Personal part
(if applicable)

525.00
2,048.00
Total equipment additions in the year 9925

zle hz 1
Class
numbe r 12 Software
52 Laptop

5
Business part
(col 3 - col 4)
525.00
2,048.00
2,573.00

Area C - Details of building additions in the year
1
Class numbe r

2
Property details

3
Total cost

4
Personal part
(if applicable)

5
Business part
(col 3 - col 4)

Total building additions in the year 9927

Area D - Details of equipment dispositions in the year
1
Class numbe r

2
Property details

3
Proceeds of disposition 4
Personal part
(if applicable)

5
Business part
(col 3 - col 4)

Area E - Details of building dispositions in the year
1
Class numbe r

2
Property details

d

Total equipment dispositions in the year 9926
Note: If you disposed of property from your business in the year, see Chapter 4 of Guide T4002, Business and Professional Income, for information about your proceeds of disposition.
3
Proceeds of disposition 4
Personal part
(if applicable)

5
Business part
(col 3 - col 4)

Total building dispositions in the year 9928
Note: If you disposed of property from your business in the year, see Chapter 4 of Guide T4002, Business and Professional Income, for information about your proceeds of disposition.

Area F - Details of land additions and dispositions in the year
Total cost of all land additions in the year
Total proceeds from all land dispositions in the year
Note: You cannot claim capital cost allowance on land.

T2125 (09)

9923
9924

99

Page 1 of 1

Tax Software Assignment Problem - Chapter 6
Gravel, Seymour-Chap 6P SIN: 527 000 079

Motor vehicle expenses (Business)

Business Auto

Fiscal period
Start
End
T2125#1:Crystal Clear Commu2010-01-01 2010-12-31
Allocation of expenses

%

Amount

100

CCA

Terminal
Loss

Recapture

1,396.21

Owned by business? Yes
No

Chart A - Motor vehicle expenses
Description of automobile Subaru
Enter the kilometers you drove in the tax year to earn business income
Enter the total kilometers you drove in the tax year

8,412 1
34,975 2
Taxable

GST

Non Eligible

Total

HST
2,582 12
597 89
779 00
49 87
458 63

Fuel and oil
Interest (see Chart B)
Insurance
License and registration
Maintenance and repairs
Leasing (See Chart D)

Total motor vehicle expenses

zle hz Business use part: Multiply line 11 by

24.05 %

Business parking fees
Supplementary business insurance

Allowable motor vehicle expenses

2,582 12
597 89
779 00
49 87
458 63

4,467 51

3
4
5
6
7
8
9
10
4,467 51 11

1,074 50

1,074 50 12

321 71

321 71 13
14

1,396 21

1,396 21 15

Chart B - Available interest expense for passenger vehicle

Date interest payments commenced
Date interest payments terminated
Total interest payable (accrual method) or paid (cash method) in the fiscal period
The number of days in the fiscal period for which interest
365 x
10.00
was payable (accrual method) or paid (cash method)
Available interest expense (amount A or B, whichever is less) (enter this amount on line 4 of Chart A above)

2007-02-15
2011-02-15
597.89 (A)
=

3,650.00 (B)
597.89

d
Privacy Act, Personal Information Bank number CRA PPU 005

100

Page 1 of 1

Solution To AP Seven - 1

CHAPTER SEVEN SOLUTIONS
Solution to Assignment Problem Seven - 1
Case A
The interest would be deductible as the direct use of the borrowed funds was to acquire the
Bee Ltd. shares.
Case B
Since the proceeds exceed the borrowings, Ms. Burns has complete flexibility with respect to linking . She could allocate all of the $100,000 to property B or alternatively, $40,000 to property A, with the other $60,000 going to property B. Any other allocation totaling $100,000 would be acceptable.
Case C
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 allocation of $75,000 [($60,000 ÷ $80,000)($100,000)] to property A and an allocation of
$25,000 [($20,000 ÷ $80,000)($100,000)] to property B.

zle hz Case D
Under ITA 20.1, the $60,000 balance will be deemed to be used to produce income. Therefore, he can continue to deduct the interest.

d
Canadian Tax Principles 2011/2012 - Solutions Manual

101

Solution To AP Seven - 2

Solution to Assignment Problem Seven - 2
The required net rental income information can be calculated as follows:
Rental Revenues:
642 Kent Street
1256 Montreal Road
112 Lisgar Avenue
23 Durham Private

$63,000
4,800
5,000
22,000

Expenses:
Property Taxes
($7,800 + $1,100 + $1,550 + $3,850)
Interest Charges
($11,700 + $1,450 + $650 + $11,500)
Other Expenses
($12,750 + $900 + $2,500 + $8,700)

$94,800

($14,300)
( 25,300)
( 24,850)

( 64,450)

Terminal Loss On Class 8 Furniture ($4,200 - $2,100)

(

Rental Income Before CCA
Maximum CCA On Class 3 And Class 1 Buildings

$ 28,250
( 28,250)

zle hz Net Rental Income

2,100)

Nil

As the Montreal Road and Lisgar Avenue buildings cost less than $50,000 each, they can be grouped together. This explains why there is no recapture resulting from the sale of the 1256
Montreal Road property. The proceeds to be deducted would be limited to the original capital cost of $37,000, and this is less than the $48,000 opening UCC of Class 3. There would, however, be a taxable capital gain on the disposition of $14,000 [(1/2)($65,000 $37,000).
Maximum available CCA would be calculated as follows:
642 Kent Street [(5%)($412,000)]
112 Lisgar Avenue [(5%)($48,000 - $37,000)]
23 Durham Private [(4%)($216,000)]

$20,600
550
8,640

Total Available

$29,790

d

The deduction of CCA on Class 3 and/or Class 1 buildings cannot be used to create a rental loss and, as a consequence, it would be limited in this situation to $28,250 of Rental Income
Before CCA. This is less than the maximum available of $29,790, resulting in a situation in which there are various possibilities with respect to how much of the $28,250 will be deducted from the buildings in Classes 3 and how much will be deducted from the building in
Class 1.
In general, CCA should be taken on assets with a lower rate first in order to leave more flexibility in the future. In this case, the maximum CCA of $8,640 should be taken on the Class 1 building , 23 Durham Private. As there are two Class 3 pools, both with a 5 percent rate, it would probably leave more future flexibility if the remaining $19,610 ($28,250 - $8,640) was taken from 642 Kent Street, the pool with the larger UCC.
Note that even though the Class 1 building generated a net rental loss of $2,050 ($22,000 $3,850 - $11,500 - $8,700), CCA can still be taken on the class as there was rental income before CCA when all rental properties were considered.

102

Canadian Tax Principles 2011/2012 - Solutions Manual

Solution To AP Seven - 3

Solution to Assignment Problem Seven - 3
Part A
The combined tax rates for the three sisters are 20 percent (15% + 5%), 37 percent (26% +
11%), and 45 percent (29% + 16%). Given these rates, the after tax returns on the bonds would be calculated as follows:
Sarah (20%)

Sally (37%)

$675

$675

$675

( 135)

( 250)

( 304)

$540

$425

Interest [(4.5%)($15,000)]
Federal/Provincial Tax Payable
At 20, 37, And 45 Percent
After Tax Return

Suzanne (45%)

$ 371

Part B
The after tax returns resulting from an investment in the preferred stock begins with the calculation of the federal and provincial Tax Payable:
Sally (37%)

Dividends [(5.6%)($15,000)]
Gross Up Of 41 Percent

$ 840
344

$ 840
344

$ 840
344

Taxable Dividend
Combined Rate (See Part A)

$1,184
20%

$1,184
37%

$1,184
45%

Tax Before Dividend Tax Credit
Dividend Tax Credit
[(13/23 + 27%)($344)]

$ 237

$ 438

$ 533

(

287)

(

(

Tax Payable (Tax Savings)

($

50)

zle hz Sarah (20%)

Suzanne (45%)

287)

$ 151

287)

$ 246

Based on the preceding calculations of federal and provincial Tax Payable, the after tax returns on the preferred shares are calculated as follows:
Sarah (20%)

Dividends [(5.6%)($15,000)]
Tax Savings (Tax Payable)

Suzanne (45%)

$840
( 151)

$840
( 246)

d

After Tax Return

$840
50

Sally (37%)

$890

$689

$594

Comparison
A comparison of the after tax rates of return can be made as follows:
Sarah (20%)

Sally (37%)

Suzanne (45%)

After Tax Interest
After Tax Dividends

$540
( 890)

$425
( 689)

$371
( 594)

Advantage (Disadvantage) Of Bonds

($350)

($264)

($223)

Recommendation
For each of the sisters, the preferred stock offers the superior after tax return.

Canadian Tax Principles 2011/2012 - Solutions Manual

103

Solution To AP Seven - 4

Solution to Assignment Problem Seven - 4
Analysis
The major considerations in deciding between the two alternative investment strategies are the after tax return and the certainty of the related cash flows.
Income Trust Units The cash flows associated with investments in trust units are not guaranteed. However, the distributions made by these trusts tend to be fairly stable and, in general, involve less risk than dividends on common shares. If she selects this investment, her $300,000 investment will acquire 15,000 units
($300,000 ÷ $20). The resulting taxable income will be $13,050
[(12)($0.0725)(15,000)]. Based on this, her Tax Payable will be calculated as follows:
Taxable Income
Tax Rate (22% + 10%)

$13,050
32%

Tax Payable

$ 4,176

Her after tax return would be calculated as follows:
Trust Distributions
Tax Payable

(

$ 8,874

zle hz After Tax Retention

$13,050
4,176)

Common Stock Purchase If Ms. Stein invests the $300,000 in the common stock, she will acquire 30,000 shares ($300,000 ÷ $10). The anticipated 2011 income from these shares is calculated as follows:
Eligible Dividends [(30,000)($0.05)]
Gross Up [(41%)($1,500)]
Taxable Capital Gain [(1/2)(30,000)($10.50 - $10.00)]

$1,500
615
7,500

Taxable Income

$9,615

Based on this figure, her Tax Payable would be calculated as follows:
Taxable Income
Tax Rate (22% + 10%)

$9,615
32%

Tax Payable

d

Tax Payable Before Credits
Dividend Tax Credit [(13/23 + 25%)($615)]

(

$3,077
501)
$2,576

Her after tax return would be calculated as follows:
Pre Tax Cash Flow ($1,500 + $15,000)
Tax Payable
After Tax Retention

(

$16,500
2,576)
$13,924

Conclusion
Based purely on after tax returns, the common stock purchase is preferable as it provides an additional $5,050 ($13,924 - $8,874). However the common stock involves more risk and uncertainty. You will have to make a decision as to whether the additional $5,050 warrants the assumption of additional risk.

104

Canadian Tax Principles 2011/2012 - Solutions Manual

Solution To AP Seven - 5

Solution to Assignment Problem Seven - 5
Mr. Shark’s minimum Net Income For Tax Purposes would be calculated as follows:
Income From A Business Or Profession:
Billed Revenues ($42,000 + $475,000 - $35,000)
Office Supplies And Office Expenses
Travel Costs
Meals And Entertainment [(1/2)($12,000)]
CCA - Building [(1/2)(4%)($526,000)]
CCA - Class 8 [(20%)($11,059)]

$482,000
56,000)
8,000)
6,000)
10,520)
2,212)

$399,268

Rental Income:
Rents Received [(6)($4,000)]
Expenses Other Than CCA
Rental Income Before CCA
CCA (Note)

$24,000
( 14,400)
$ 9,600
( 9,600)

Nil

Investment Income:
Eligible Dividends Received
Gross Up Of 41 Percent

$18,000
7,380

(
(
(
(
(

Net Income For Tax Purposes

25,380
$424,648

zle hz Note The maximum available CCA on the rental portion of the property would be
$10,520 [(1/2)(4%)($526,000)]. However, because CCA cannot be used to create or increase a rental loss, the deduction is limited in this case to the $9,600 of income before
CCA.

d
Canadian Tax Principles 2011/2012 - Solutions Manual

105

Solution To AP Seven - 6

Solution to Assignment Problem Seven - 6
Taxable Income And Tax Payable
The amount of taxable income and tax payable resulting from the investments would be calculated as follows:
Interest On Term Deposit [(£11,250)($1.55)] (Note)
Excess Withholding [(25% - 15%)(£11,250)($1.55)]

(

$17,438
1,744)

$15,694

Canadian Realty Trust Distribution [($5.20)(4,500)]
Return Of Capital [($2.40)(4,500)]

$23,400
( 10,800)

12,600

Fidelitee Capital Gain [($1.00)(6,200)]
Non-Taxable One-Half

(

$ 6,200
3,100)

3,100

$ 9,300
3,813

13,113

Fidelitee Eligible Dividends [($1.50)(6,200)]
Dividend Gross Up [(41%)($9,300)]
Fidelitee Interest [($1.25)(6,200)]

7,750

Taxable Income
Tax Rate (29% + 16%)

$52,257
45%

zle hz Tax Before Credits
Dividend Tax Credit [($3,813)(13/23 + 30%)]
Foreign Tax Credit [(15%)(£11,250)($1.55)] (Note)
Tax Payable

(
(

$23,516
3,299)
2,616)
$17,601

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.

d

We would also note that 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.
As a final point, this problem does not contain enough information to do a complete calculation of the foreign tax credit. We have to assume that the credit is equal to the maximum 15 percent of the amount withheld.

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 would be as follows:
$31.53 [($198,400 + $23,250) ÷ (6,200 + 830.36)]

106

Canadian Tax Principles 2011/2012 - Solutions Manual

Solution To AP Seven - 7

Solution to Assignment Problem Seven - 7
Net Business Income
Accounting Net Income
Additions:
Amortization Expense
Meals And Entertainment (Note 1)
Automobile Operating Costs - Personal (Note 2)

$211,000
$18,000
5,750
1,350

25,100
$236,100

Deductions:
Capital Cost Allowance
Automobile (Note 3)
Furniture And Fixtures (Note 4)
Building (Note 5)

($ 3,234)
( 9,300)
( 27,000)

Net Business Income For Tax Purposes

(

39,534)
$196,566

zle hz Note 1 As the business deducted 100 percent of the meals and entertainment costs, the non-deductible one-half of this amount needs to be added back to arrive at Net Business
Income For Tax Purposes.
Note 2 As the business deducted 100 percent of the automobile operating costs, the portion related to Derek’s personal use must be added back. This amount would be
$1,350 [($4,800)(9,000 ÷ 32,000)].
Note 3 The addition to UCC for the car would be limited to $30,000 and it would be allocated to a separate Class 10.1. Maximum CCA for 2011 would be $4,500
[ ( 1 / 2 ) ( 3 0 % ) ( $ 3 0 , 0 0 0 ) ] . H o w e v e r, t h e b u s i n e s s c a n o n l y d e d u c t $ 3 , 2 3 4
[($4,500)(23,000 ÷ 32,000)].
Note 4

CCA for Class 8 would be calculated as follows:

Base For CCA
Rate
CCA for 2011

d

UCC January 1, 2011
Additions
Disposals (Lesser Of $10,000 Or $3,000)
One-Half Net Additions [(1/2)($12,000 - $3,000)]

$42,000
12,000
( 3,000)
( 4,500)
$46,500
20%
$ 9,300

Note 5 As the building was acquired after March 18, 2007, it is eligible for an enhanced
CCA rate of 6 percent. This results in a CCA deduction of $27,000 [(6%)($450,000)]. To qualify for this rate, the building must be allocated to a separate Class 1.
Property Income
Eligible Dividends On Breax
Gross Up On Eligible Dividends [(41%)($8,000)]
Realco Income Trust Units [(5,000)($1.50)]
Debt Securities (Note 5)
Foreign Term Deposit (Note 6)

$ 8,000
3,280
7,500
12,000
15,000

Total Property Income

$45,780

Canadian Tax Principles 2011/2012 - Solutions Manual

107

Solution To AP Seven - 7
Note 5 Derek would have to recognize $8,000 [(8%)($100,000)] in interest on the
July 1, 2011 anniversary of the debt security. In addition, because a $12,000 payment is received on December 31, 2011, he would have to recognize an additional $4,000
($12,000, less the $8,000 recognized on the anniversary date).
Note 6 As non-business income is involved, the tax credit will be limited to $3,000
[(15%)($20,000)]. The remaining $5,000 ($8,000 - $3,000) can be deducted against the interest. This leaves an inclusion of $15,000 ($20,000 - $5,000).
Capital Gain
The capital gain on the Breax common shares would be calculated as follows:
Proceeds [($65)(1,000)]
Adjusted Cost Base [($130,000)(1,000 ÷ 2,500)]

$65,000
( 52,000)

Capital Gain
Inclusion Rate

$13,000
1/2

Taxable Capital Gain

$ 6,500

zle hz Net Income For Tax Purposes And Taxable Income
There are no Taxable Income deductions available. As a consequence, Taxable Income is equal to Net Income For Tax Purposes.
Net Business Income
Total Property Income
Taxable Capital Gain

$196,566
45,780
6,500

Net Income For Tax Purposes And Taxable Income

$248,846

Tax Payable
Tax Payable would be calculated as follows:

$27,256
34,813

Tax Before Credits
Tax Credits:
Basic Personal Amount (Derek)
Spouse ($10,527 - $9,500)
Child [(2)($2,131)]
Disability Transferred From Brad
Disability Supplement Transferred From Brad
Transit Passes [(2)($60)(11)] (Note 7)
Child Fitness (Note 8)
First Time Home Buyer
Transfer Of Bill’s Education Credits (Note 9)
Medical Expenses (Note 10)

$62,069

d

Tax On First $128,800
Tax On Next $120,046 ($248,846 - $128,800) At 29 Percent

Total Credit Base
Rate
Dividend Tax Credit On Eligible
Dividends [(13/23)($3,280)]
Foreign Tax Credit [(15%)($20,000)]
Federal Tax Payable

108

($10,527)
( 1,027)
( 4,262)
( 7,341)
( 4,282)
( 1,320)
( 1,300)
( 5,000)
( 5,000)
( 18,948)
($59,007)
15%

(

8,851)

(
(

1,854)
3,000)
$48,364

Canadian Tax Principles 2011/2012 - Solutions Manual

Solution To AP Seven - 7
Note 7 Since Bill is over 18, Derek cannot claim his transit pass credit. Bill could claim it himself, but his Net Income For Tax Purposes is already less than his basic personal credit amount. As a result, claiming the transit pass credit would not result in less Tax Payable.
Note 8 Mr. Fontaine can claim the fitness fees of $400 for each child. In addition, he can claim the $500 supplement that is available because Brad is under 18 and qualifies for the disability credit. This results in a total of $1,300 [(2)($400) + $500].
Note 9 Bill’s total education credits are $13,150 [$8,500 + (10)($400 + $65)], well in excess of the maximum transfer of $5,000. Bill’s Net Income For Tax Purposes of
$10,000 is less than the basic personal credit amount. The maximum transfer of education related amounts is $5,000.
Note 10

The base for the medical expense tax credit is calculated as follows:

Medical Expenses Of Derek, Emily, Brad And Barbara
($1,400 + $1,600 + $11,400 + $2,300)
Lesser Of:
• [(3%)($248,846)] = $7,465
• 2011 Threshold Amount = $2,052

zle hz Balance Before Dependants 18 And Over
Bill’s Medical Expenses
Reduced By The Lesser Of:
• $2,052
• [(3%)($10,000)] = $300

$ 16,700
( 2,052)
$ 14,648

$4,600

(

300)

Medical Expense Tax Credit Base

4,300
$18,948

Prior to 2011, medical expenses claimed for an adult dependant were limited to an absolute amount of $10,000. The March 22, 2011 budget proposes the elimination of this constraint.

d
Canadian Tax Principles 2011/2012 - Solutions Manual

109

Solution To AP Seven - 8

Solution to Assignment Problem Seven - 8
Employment Income
Gross Wages
RPP Contributions
Union Dues

(
(

Net Employment Income

$62,000
3,125)
572)
$58,303

Property Income
Eligible Dividends Received
Gross Up Of Eligible Dividends (41%)
Non-Eligible Dividends Received
Gross Up Of Non-Eligible Dividends (25%)
Foreign Dividends Before Withholding ($10,625 ÷ .85)
Interest

$11,700
4,797
3,250
813
12,500
2,843

Property Income

$35,903

zle hz Net Business Income

Net Cash Flow
$123,500
Principal Payments On Car Loan ($13,200 - $4,920)
8,280
Non-Deductible Interest [($4,920 - (365)($10 Daily Maximum)]
1,270
December 31 Receivables
17,350
January 1 Billed Receivables
( 13,400)
December 31 Work In Process (Note 1)
21,250
January 1 Work In Process
( 17,470)
December 31 Accounts Payable
(
9,272)
January 1 Accounts Payable
8,670
Subtotal
CCA ($17,642 + $9,188 + $4,500) (Note 2)
Car Operating Costs (Already Deducted)
Net Business Income

(

$140,178
31,330)
Nil
$108,848

d

Note 1 Since the business involves management consulting , Jack cannot use the
“billed basis of income recognition”. As a result, he must include unbilled work in progress in his income.
Note 2 The CCA would be calculated as follows:
Class 1 CCA
January 1, 2011 UCC
Additions (Improvements)
One-Half Net Additions

$273,540
41,000
(
20,500)

Base For CCA
Rate

$294,040
6%

CCA

$ 17,642

As the building was acquired after March 18, 2007, was new, and was used 100 percent for non-residential purposes, it is eligible for the 6 percent CCA rate.

110

Canadian Tax Principles 2011/2012 - Solutions Manual

Solution To AP Seven - 8
Class 8 CCA
January 1, 2011 UCC
Additions
Disposals - Lesser Of:
• Proceeds Of Disposition = $18,600
• Capital Cost = $42,000
One-Half Net Additions [(1/2)($50,000 - $18,600)]

$30,240
50,000
( 18,600)
( 15,700)

Base For CCA
Rate

$45,940
20%

CCA

$ 9,188
Class 10.1 CCA

As the cost of the car exceeds $30,000, the addition to Class 10.1 is limited to this value. The maximum deduction for 2011 would be $4,500 [(30%)(1/2)($30,000)].

Net Income For Tax Purposes And Taxable Income
There are no Taxable Income deductions available. As a consequence, Taxable Income is equal to Net Income For Tax Purposes.

zle hz Net Employment Income
Property Income
Net Business Income
Pension Income

$ 58,303
35,903
108,848
42,000

Net Income For Tax Purposes And Taxable Income

$245,054

d
Canadian Tax Principles 2011/2012 - Solutions Manual

111

Solution To AP Seven - 8
Tax Payable
Tax Payable would be calculated as follows:
Tax On First $128,800
Tax On Next $116,254 ($245,054 - $128,800) At 29 Percent

$27,256
33,714

Tax Before Credits
Tax Credits:
Basic Personal Amount (Jack)
Spouse ($10,527 - $9,700)
Caregiver (Jerome)
Jack’s Age Credit [$6,537 - (15%)($245,054 - $32,961)
Jack’s Pension Credit
EI
CPP
Canada Employment
Transfer Of Spouse’s Age Credit
[$6,537 - (15%)($9,700 - $32,961)
Transfer Of Spouse’s Pension Credit
Transfer Of Jerome’s Disability Credit
Transfer Of Suzanne’s Education Credits (Note 5)
Medical Expenses (Note 6)

$60,970

zle hz Total Credit Base
Rate
Charitable Donations (to United Way)
[(15%)($200) + (29%)($2,400 - $200)]
Dividend Tax Credit On:
Eligible Dividends [(13/23)($4,797)]
Non-Eligible Dividends [(2/3)($813)]
Foreign Tax Credit - Amount Withheld [(15%)($12,500)]

($10,527)
(
827)
( 4,282)
Nil
( 2,000)
(
787)
( 2,218)
( 1,065)
( 6,537)
( 2,000)
( 7,341)
( 5,000)
( 13,650)
($56,234)
15%

Federal Tax Payable

(

8,435)

(

668)

(
(
(

2,711)
542)
1,875)
$46,739

Note 5 Suzanne’s child support received is not included in her Net Income For Tax
Purposes. Given this, Suzanne has Net Income For Tax Purposes of nil and would qualify as a dependant of Jack’s. Even though she lives with Jack, he cannot claim the caregiver tax credit for her as she is not mentally or physically infirm.

Note 6

112

d

Suzanne’s total education credits are $6,460 [$4,600 + (4)($400) + (4)($65)], well in excess of the maximum transfer of $5,000. The maximum transfer of education related amounts to Jack is $5,000.
The claim for medical expenses is determined as follows:

Canadian Tax Principles 2011/2012 - Solutions Manual

Solution To AP Seven - 8
Medical Expenses Of Jack And Sharon ($600 + $1,100)
Lesser Of:
• [[(3%)($245,054)] = $7,352
• 2011 Threshold Amount = $2,052
Balance Before Dependants 18 And Over

$1,700
( 2,052)
Nil

Jerome’s Medical Expenses
Reduced By The Lesser Of:
• $2,052
• [(3%)(Nil)] = Nil

$12,250

Suzanne’s Medical Expenses
Reduced By The Lesser Of:
• $2,052
• [(3%)(Nil)] = Nil

$ 1,400

Nil

Nil

Total Medical Expense Claim

12,250

1,400
$13,650

Prior to 2011, medical expenses claimed for an adult dependant were limited to an absolute amount of $10,000. The March 22, 2011 budget proposes the elimination of this constraint.

d

zle hz Canadian Tax Principles 2011/2012 - Solutions Manual

113

Solution To AP Tax Software Chapter 7

Solution to Problem For Tax Software Chapter 7
This solution includes selected schedules and worksheets from the ProFile T1 return.
Note that the program can only be used to calculate 2010 (not 2011) tax returns and the problem and solution reflect this fact.
The tax return is available on the Instructor’s Resource CD-ROM under the heading
“Tax Software Assignment Problems”. The ProFile version contains the complete return. The .PDF version contains only the schedules required in the problem.
·

To view the .PDF file that contains the required schedules, select the file “PDF
Software Problem Chapter 7” from the PDF Format drop-down list.

·

To view the ProFile file of the complete tax return, select the file “Software
Problem Chapter 7” from the ProFile Format drop-down list.

For more information on how to use the ProFile tax program, please refer to the sample tax returns in the Study Guide.
The “Other income - interest” on Mary ’s T3 appears on Line 130 on the T1, not on Schedule 4.
Of the amounts listed for interest and penalties paid by Seymour, the following are deductible on his Statement Of Business or Professional Income (T2125):

zle hz Interest on credit cards for business expenses
Interest on laptop and software loan

$627.27
104.24

Interest deductible from professional income

$731.51

The interest of $1,372.52 on the loan to purchase XXX Art Films securities is deductible from investment income on Schedule 4. Although he no longer holds the securities in the
Company, ITA 20.1 permits the interest on the borrowed funds to be deducted (disappearing source rules).
The following interest and penalties paid are not deductible: on on on on for loan to make 2009 RRSP contribution late payment of 2009 income tax insufficient tax instalments for 2009 late GST/HST payments late filing of 2009 tax return

d

Interest
Interest
Interest
Interest
Penalty

$162.15
233.72
52.81
212.82
303.92

Note that while penalties for late tax returns and interest on late payment of income taxes and
GST/HST, and insufficient instalments are not deductible, interest paid due to late payment property taxes is deductible. The interest on the late property taxes was deducted as part of the property taxes in his home office costs in Chapter 6.
As the deduction of CCA cannot be used to create or increase a net rental loss, maximum CCA cannot be taken. When the maximum CCA cannot be deducted, the CCA should usually be taken from the classes with the lowest rates. However, in this case, since the rental income before CCA is only $180.04, it is advisable to take the CCA on the appliances (20 percent) rather than the house (4 percent).
Since Seymour has been living in Mary ’s house since 2008, and only one taxpayer in a family unit can designate a property as a principal residence for a particular year, it is improbable that he will designate the Moncton property as a principal residence after 2008. As a result, the fact that it is more likely the appliances will decrease in value is the key factor for the decision to take CCA on them. The CCA on the building would be recaptured on a subsequent sale if the proceeds were greater than the UCC.
Since Seymour filed late last year, his penalty for late filing this year will be doubled. He should not file late (June 15 deadline) and he should attempt to pay his taxes by April 30.

114

Canadian Tax Principles 2011/2012 - Solutions Manual

Solution To AP Tax Software Chapter 7
As Seymour appears to have made no instalments for 2010, he should be strongly advised to pay his instalments for 2011 on time to prevent more non-deductible interest.
Either spouse can claim the child tax credit and charitable donations made by the couple, including donations on T4s. Although the value of the credit is the same for either spouse, one consideration is whether there is any interest arising from insufficient instalments for one spouse, but not the other. In this case, claiming the credit for Seymour will decrease the non-deductible interest from insufficient instalments that he will be charged for 2010. Since
Mary has received refunds in the last two years, she has no liability for instalments in 2010.
To transfer the child tax credit, go to the form, Dependants on Mary ’s return. Answer No to the question near the top of the form “Claim $2,101 child amount?”. Seymour’s return will automatically show Yes to this question.
To transfer the donations in the program, open the form Donations on Mary ’s return. On your mouse, click the right button (i.e. alternate click) and select “Transfer all donations”. All donations, including the “Reported on slips” line containing $1,000, will be transferred to
Seymour’s return.
Changes to the Summary form from the previous version, excluding calculated amounts other than Balance Owing (Refund).

Chapter 7

zle hz Summary Line Changed

Mary

Seymour

Taxable dividends

1,866

Interest income

1,671

Other income

Self-employment (decreased by interest expense)

45,752

Carrying charges and interest
Child tax credit

Donations credit

1,373
(2,101)

2,101

(480)

480

Dividend tax credit

335

Foreign tax credit

Balance Owing (Refund)

118

215

37
2,427

9,951

d

Note that since the rental income was nil, there is no change in the Summary to indicate the addition of the rental information.

Canadian Tax Principles 2011/2012 - Solutions Manual

115

Tax Software Assignment Problem - Chapter 7
Walford, Mary-Chap 7P SIN: 527 000 129

Summary

2010 Tax Summary (Federal)
Mary-Chap 7P

Total income
Employment *
Old Age Security
CPP/QPP benefits
Other pensions
Split-pension amount
Universal Child Care Benefit
Employment Insurance
Taxable dividends
Interest
Limited partnership
RDSP
Rental
Taxable capital gains
Support payments
RRSP
Other
Self-employment *
Workers' compensation and social assistance

101
113
114
115
116
117
119
120
121
122
125
126
127
128
129
130
135

147
Total income 150
207
208
210
212
213
214
215
217
219
220
221
222
224
229
235
231
Net income 236

1,866
1,671

215

156,618

Total payable
Federal tax
Non-refundable tax credits
Dividend tax credit
Min. tax carry-over/other *

404
350
425
426
Basic federal tax 429

Non resident surtax
Foreign tax credits / other

2011 Estimated
GST/HST credit
Child Tax Benefit
RRSP contribution limit
More than one line is considered

405
406
410
414
417
415
418
Net federal tax 420
CPP contributions payable
421
42,406 EI self-employment
430
Social benefits repayment
422
Provincial/territorial tax
428
Total payable 435
Federal tax
Political/inv. tax credit/other *
1,373 Labour-sponsored tax credit
2,091 Alternative minimum tax
WITB Prepayment (RC210)
Additional tax on RESP

156,618

244
248
249
250
251
254
255
256
Taxable income 260

*

300
301
303
367
306
308
363
364
365
369
313
314
316
318
319
323
332
Subtotal 335
338
Credit at 15%
45,870 Donations and gifts
349
Non-refundable tax credits 350

d

Taxable income
Canadian Forces personnel
Home relocation loan
Security options deductions
Other payments deduction
Losses of other years *
Capital gains deduction
Northern residents
Additional deductions

152,866

Mary-Chap 7P

Non-refundable tax credits
Basic personal amount
Age amount
Spouse / eligible dependant *
Amount for children
Infirm/caregiver *
CPP/QPP/PPIP/EI *
Canada employment amount
Public transit passes amount
118 Children's fitness amount
Home buyers/Home renovation *
Adoption expenses
Pension income amount
Disability amount
Transfers *
Interest on student loans
Tuition / education
45,752 Medical expenses

zle hz Net income
RPP
RRSP *
Split-Pension Deduction
Union and professional dues
UCCB repayment
Child care expenses
Disability supports deduction
Business investment loss
Moving expenses
Support payments
Carrying charges and interest
CPP/QPP/PIPP *
Exploration and development
Employment expenses
Social benefits repayment
Other deductions *

Seymour-Chap 7P

Total credits
Income tax deducted *
QC or YT abatement *
CPP/EI overpayment *
Medical expense supplement
WITB (Schedule 6)
156,618
42,406 Other credits *
GST/HST rebate
Mary-Chap 7P
Seymour-Chap 7P
Instalments
Provincial tax credits
Total credits

22,450 00

8,235

Balance owing (refund)
Combined balance (refund)

437
440
448
452
453
454
457
476
479
482

Seymour-Chap 7P

10,382

10,382

2,101
2,911
1,051

2,091

3,595
14,344
2,152
2,152

18,169
2,725
480
3,205

35,463
2,152
335

6,462
3,205

32,976

3,257

37
32,939

3,257

32,939

3,257
4,183

18,153
51,093

2,511
9,951

48,665

48,665
2,427

9,951

12,378

Complete Return Available On Instructor's CD-ROM
116

Page 1 of 1

Tax Software Assignment Problem - Chapter 7
Gravel, Seymour-Chap 7P SIN: 527 000 079
Canada Revenue
Agency

Agence du revenu du Canada

Statement of
Business or Professional Activities

Identification
Your name Gravel, Seymour-Chap 7P
Business Name
Crystal Clear Communications
Business address
126 Prince William Street

2
Your social insurance number
527 000 079
Account Number
(15 characters)
_____ ____ RT ____
City, province or territory
Postal code
Saint John
E2L 4H9
NB
Was 2010 your last year of business? Yes
No X

Fiscal Period
From:
Year/Month/Day
Year/Month/Day
2010-01-01
Calendar Year to: 2010-12-31
Main product or service
Writing and editing
Tax shelter identification number
TS______

Partnership Business Number
(9 digits)
_________

Industry code
711510
(see the appendix in Guide T4002,
Business and Professional Income)
Your percentage of the partnership
100.0000 %

Name and address of person or firm preparing this form

Part 1 – Business income
If you have business income, tick this box and complete this part. Do not complete parts 1 and 2 on the same form.

Type of income

zle hz 2.

Business

Commission

Sales, commissions, or fees
Income reported on T4 slips
Income reported on T4A slips

A

Minus
Goods and services tax and provincial sales tax (GST and PST) or harmonized sales tax (HST) (if included in sales above)
Returns, allowances, and discounts (if included in sales above)
Total of the above two lines
Adjusted gross sales (line A minus line B) (enter this amount on line 8000 in below)

B
C

Part 2 – Professional income

3. X If you have professional income, tick this box and complete this part. Do not complete parts 1 and 2 on the same form.
Professional fees (includes work-in-progress)
Income reported on T4A slips

d

Minus
Goods and services tax and provincial sales tax (GST and PST) or harmonized sales tax (HST) (if included in fees above)
Work-in-progress (WIP), end of the year, per election to exclude WIP
(see Chapter 2 of the guide)
Total of the above two lines
Subtotal (line D minus line E)
Plus
Work-in-progress (WIP), start of the year, per election to exclude WIP (see Chapter 2 of the guide)
Adjusted professional fees (total of the above two lines) (enter this amount on line 8000 in Part 3, below)

41,603 17
20,000 00
61,603 17 D

E
61,603 17

61,603 17 F

T2125 E (10)

117

Page 1 of 3

Tax Software Assignment Problem - Chapter 7
Gravel, Seymour-Chap 7P SIN: 527 000 079

Crystal Clear Communications

Part 3 – Gross business or professional income
Adjusted gross sales (from line C in Part 1) or adjusted professional fees (from line F in Part 2)
Plus
Reserves deducted last year

8000

61,603 17 G

8290

Recapture of CCA and CEC
Other income

8230
Total of the above lines

H

8299
61,603 17
Gross business or professional income (line G plus line H)
Enter this amount on the appropriate line of your income tax and benefit return: business on line 162, professional on line 164, or commission on line 166
If GST/HST has been remitted and/or an input tax credit has been claimed, do not include GST/HST in the calculation of cost of goods sold, expenses or net income (loss) in parts 4 to 6.

Part 4 – Cost of goods sold and gross profit
If you have business income, complete this part. Enter only the business part of the costs.
Gross business income from line 8299 in Part 3

I

zle hz 8300
Opening inventory (include raw materials, goods in process, and finished goods)
Purchases during the year (net of returns, allowances, and discounts)
8320
Direct wage costs
8340
Subcontracts
8360
Other costs
8450
Total of the above five lines
Minus
8500
Closing inventory (include raw materials, goods in process, and finished goods)
Cost of goods sold 8518
Gross profit (line I minus line J)

J
8519

Part 5 – Net income (loss) before adjustments

Gross profit from line 8519 in Part 4 above, or gross income from line 8299 in Part 3

61,603 17 K
8521
8523
8590
8690
8710
8760
8810
8811
8860
8871
8910
8960
9060
9180
9200
9220
9224
9275

d

Expenses (enter only the business part)
Advertising
Meals and entertainment
1,494 26 x 50%
Meals and entertainment (long haul truck drivers) x 75%
Bad debts
Insurance
Interest
Business tax, fees, licences, dues, memberships, and subscriptions
Office expenses
Supplies
Legal, accounting, and other professional fees
Management and administration fees
Rent
Maintenance and repairs
Salaries, wages, and benefits (including employer's contributions)
Property taxes
Travel (including transportation fees, accomodations, and allowable part of meals)
Telephone and utilities
Fuel costs (except for motor vehicles)
Delivery, freight, and express
Motor vehicle expenses (not including CCA)
1,396 21
(see Chart A) - from worksheet
Motor vehicle expenses (not including CCA)
(see Chart A) - other
Allowance on eligible capital property
Capital cost allowance (from Area A)
Bank service charges
156 20

747 13
126 16
731 51
231 00
2,982 17
500 00

1,767 88
1,063 13
110 00

9281
9935
9936

1,396 21

Other expenses
=
156 20 9270
Total business expenses 9368
Net income (loss) before adjustments (line K minus line L)

156 20
13,908 26

T2125 E (10)

118

4,096 87

9369

13,908 26 L
47,694 91
Page 2 of 3

Tax Software Assignment Problem - Chapter 7
Gravel, Seymour-Chap 7P SIN: 527 000 079

Crystal Clear Communications

Part 6 – Your net Income (loss)
Your share of the amount on line 9369 in Part 5 above
47,694 91 M
9974
N
Plus : GST/HST rebate for partners received in the year (see Chapter 3)
47,694 91
47,694 91
Total (line M plus line N)
Minus - Other amounts deductible from your share of net partnership income (loss)
(from the chart on page 3)
9943
47,694 91
Net income (loss) after adjustments (line O minus line P)
9945
1,942 55
Minus - Business-use-of-home expenses (from the chart on page 3)
9946
45,752 36
Your net income (loss) (line Q minus line R)
Enter this amount on the appropriate line of your income tax and benefit return: business on line 135, professional on line 137, or commission on line 139
Other amounts deductible from your share of net partnership income (loss )
Claim expenses you incurred that were not included in the partnership statement of income and expenses, and for which the partnership did not reimburse you.

O
P
Q
R

Other amounts deductible from your share of the partnership
(total of the above lines) (enter this amount on line 9943, in Part 6)
Calculation of business-use-of-home expenses
Area of home used for business
Total area of home
Heat
Electricity
Insurance
Maintenance
Mortgage interest
Property taxes

zle hz Minus - Personal-use part

(A)
(B)

160
1,500
1,712 86
1,641 18
757 55
2,988 05
8,456 22
2,655 53
Subtotal

18,211 39
16,268 84
1,942 55

Subtotal

Plus - Amount carried forward from previous year

Subtotal
Minus - Net income (loss) after adjustments (from line Q in Part 6) (If negative, enter "0")
Business-use-of-home expenses available to carry forward (line 1 minus line 2) (If negative, enter "0")
Allowable claim (the lesser of amounts 1 or 2 above) (Enter this amount on line 9945 in Part 6)
Details of other partners
Spouse's first name
Last name
Mary-Chap 7P
Walford
Address:
126 Prince William Street Saint John, New Brunswick E2L 4H9
Partner's first name
Last name

Address:
Partner's first name
Address:
Partner's first name
Address:
Partner's first name

Last name

SIN
___ ___ ___

Last name

SIN
___ ___ ___

Last name

SIN
___ ___ ___

Last name

SIN
___ ___ ___

Address:
Details of equity
Total business liabilities
Drawings in 2010
Capital contributions in 2010

T2125 E (10)

SIN
___ ___ ___

d

Address:
Partner's first name

SIN
527 000 129

1,942 55 1
47,694 91 2
1,942 55

% of partnership
$ share

%
0.00

% of partnership
$ share

%

% of partnership
$ share

%

% of partnership
$ share

%

% of partnership
$ share

%

% of partnership
$ share

%

9931
9932
9933

119

Page 3 of 3

Tax Software Assignment Problem - Chapter 7
Gravel, Seymour-Chap 7P SIN: 527 000 079
Canada Revenue
Agency

Agence du revenu du Canada

STATEMENT OF REAL ESTATE RENTALS
1

Identification
Your name Seymour-Chap 7P Gravel
Fiscal
Year/Month/Day
Year/Month/Day
period:
2010-01-01
to: 2010-12-31
Name and address of person or firm preparing this form

Account Number (15 characters)
_____ ____ RT ____

Your social insurance number 527 000 079
Final year of rental operation? Yes

No X

Partnership Business Number (9 digits)
_________
Tax shelter identification number
________
Your % of ownership
100.0000 % Industry code 531111

Income
# of units
Address 50 King Street
City
Moncton
Province NB
Postal code
Address
City
Province __
Postal code
Enter the total of your gross rents
Other related income (for example, premiums and leases, sharecropping)

E1C 4M2

1

zle hz Personal use percentage

Total expense

Advertising
Insurance
Interest
Office expenses
Legal, accounting, and other professional fees
Management and administration fees
Maintenance and repairs
Salaries, wages, and benefits
(including employer's contributions)
Property taxes
Travel
Utilities
Motor vehicle expenses (not including CCA)
Other expenses

9060
9180
9200
9220
9281
9270

8141

12,000 00

8230
8299

12,000 00 a

%
Personal portion

650 00
4,207 25
3,352 71

3,610 00

11,819 96 9949

d

Total
Deductible expenses (total expenses minus personal portion)
Net income (loss) before adjustments (line a minus line b)
Co-owners - Your share of line 9369 above
Minus: Other expenses of the co-owner

8521
8690
8710
8810
8860
8871
8960

12,000 00

___ ___

Gross rental income - (enter this amount on line 160 of your income tax and benefit return)

Expenses

Gross rents

9369
9945
Subtotal

Plus: Recaptured capital cost allowance (co-owners – enter your share of the amount) (see Chapter 3)

180 04
9947

Subtotal
Minus: Terminal loss (co-owners – enter your share of the amount) (see Chapter 3)

180 04
9948

Subtotal
Minus: Capital cost allowance (from Area A)
Net income (loss) - If you are a sole proprietor or a co-owner, enter this amount on line 9946
Partnerships - Your share of line d above or the amount from slip T5013 or T5013A
Plus: GST/HST rebate for partners received in the year
Minus: Other expenses of the partner
Your net income (loss) (enter this amount on line 126 of your income tax and benefit return)

11,819 96 b
180 04
180 04 c

9936

180 04
180 04 d 9974
9943
9946

T776 (10)

120

Page 1 of 2

Tax Software Assignment Problem - Chapter 7
Gravel, Seymour-Chap 7P SIN: 527 000 079

50 King Street Moncton NB

Area A - Calculation of capital cost allowance claim
1
2
3
4
5*
6
7
8
9
10
Class Undepreciated
Cost of
Proceeds of
UCC after Adjustment for Base amount Rate
CCA for the UCC at the end number capital additions in the dispositions in additions and current-year for capital cost
%
year (col 7 x 8 of the year cost(UCC) at year (Areas B the year (Areas dispositions additions (1/2 x allowance or a lesser
(col 5 - 9) start of year and C)
D and E)
(col 2 + 3 - 4) (col 3 - 4)). If
(col 5 - 6) amount) negative, enter
"0"
1
150,000.00
150,000.00
150,000.00
4
150,000.00
8
1,350.00
1,350.00
1,350.00
20
180.04
1,169.96
Total CCA claim for the year **
180.04
*

If you have a negative amount in this column, add it to income as a recapture under "Recaptured capital cost allowance" on line 9947 on page 1 of this form. If there is no property left in the class and there is a positive amount in the column, deduct the amount from income as a terminal loss under "Terminal loss" on line 9948 on page 1 of this form. For more information, read Chapter 3 of guide T4036, Rental Income.

** Sole proprietors and partnerships - Enter the total claim on line 9936 on page 1. Co-owners - Enter only your share of the total claim on line 9936 on page 1 of this form.

Area B - Details of equipment and other property additions in the year
1
Class

2
Property details

3
Total cost

4
Personal portion
(if applicable)

5
Rental portion
(Col 3 - Col 4)

Total equipment and other property additions in the year 9925

Area C - Details of building and leasehold interest additions in the year
1
Class

2
Property details

3
Total cost

zle hz 4
Personal portion
(if applicable)

5
Rental portion
(Col 3 - Col 4)

Total building additions in the year 9927

Area D - Details of equipment and other property dispositions in the year
1
Class

2
Property details

3
Proceeds of disposition (should not be more than the capital cost)

4
Personal portion
(if applicable)

5
Rental portion
(Col 3 - Col 4)

Total equipment and other property dispositions in the year 9926

Note:

If you disposed of rental property in the year, see Chapter 3 in Guide T4036, Rental Income, for information about your proceeds of disposition.

Area E - Details of building and leasehold interest dispositions in the year
1
Class

2
Property details

4
Personal portion
(if applicable)

5
Rental portion
(Col 3 - Col 4)

d

3
Proceeds of disposition (should not be more than the capital cost)

Total building dispositions in the year 9928

Note:

If you disposed of rental property in the year, see Chapter 3 in Guide T4036, Rental Income, for information about your proceeds of disposition.

Area F - Details of land additions and dispositions in the year
Cost of all land additions in the year
Proceeds from all land dispositions in the year
Note: You cannot claim capital cost allowance on land.

9923
9924

121

Privacy Act, Personal Information Bank number CRA PPU 005

Tax Software Assignment Problem - Chapter 7
Walford, Mary-Chap 7P SIN: 527 000 129

T1-2010

Statement of Investment Income

Schedule 4

State the names of the payers below and attach any information slips you received. Attach a copy of this schedule to your return. I-

Taxable amount of dividends (eligible and other than eligible) from taxable Canadian corporations (see line 120 in the guide) Taxable amount of dividends other than eligible dividends (specify):
180

Add lines 1 to 3 and enter this amount on line 180 of your return.
Taxable amount of eligible dividends (specify):
TD Asset Management
Power Corp

498 24
1,368 00

Add lines 4 to 7 and enter this amount on line 120 of your return.
II -

120

Interest and other investment income (see line 121 in the guide)
Specify:
TD Bank (50.0% of 236.11)

118 06

Income from foreign sources
TD Asset Management

1,553 10
121

Enter this amount on line 121 of your return.
III -

1,866 24

1,671 16

zle hz Net partnership income (loss) (see line 122 in the guide)
Reported on T5013 slips
Reported on Resource form
Net income (loss) from certified films and productions
Enter this amount on line 122 of your return.

122

IV - Carrying charges and interest expenses (see line 221 in the guide)
Safety deposit box charges
Accounting fees
Management or safe custody fees
Investment counsel fees
Reported on T5013 slips

Interest on money borrowed to earn interest, dividend, and royalty income
Interest on money borrowed to acquire an interest in a limited partnership or a partnership in which you are not an active partner
Enter this amount on line 221 of your return.

221

d
122

Privacy Act, Personal Information Bank number CRA PPU 005
Page 1 of 1

Tax Software Assignment Problem - Chapter 7
Gravel, Seymour-Chap 7P SIN: 527 000 079

T1-2010

Statement of Investment Income

Schedule 4

State the names of the payers below and attach any information slips you received. Attach a copy of this schedule to your return. I-

Taxable amount of dividends (eligible and other than eligible) from taxable Canadian corporations (see line 120 in the guide) Taxable amount of dividends other than eligible dividends (specify):
180

Add lines 1 to 3 and enter this amount on line 180 of your return.
Taxable amount of eligible dividends (specify):
Add lines 4 to 7 and enter this amount on line 120 of your return.
II -

120

Interest and other investment income (see line 121 in the guide)
Specify:
TD Bank (50.0% of 236.11) **

118 06

Income from foreign sources
Enter this amount on line 121 of your return.
III -

121

118 06

Net partnership income (loss) (see line 122 in the guide)
Reported on T5013 slips
Reported on Resource form
Net income (loss) from certified films and productions

zle hz Enter this amount on line 122 of your return.

122

IV - Carrying charges and interest expenses (see line 221 in the guide)
Safety deposit box charges
Accounting fees
Management or safe custody fees
Investment counsel fees
Reported on T5013 slips

Interest on money borrowed to earn interest, dividend, and royalty income
Interest on money borrowed to acquire an interest in a limited partnership or a partnership in which you are not an active partner
Enter this amount on line 221 of your return.

1,372 52

221

1,372 52

d
123

Privacy Act, Personal Information Bank number CRA PPU 005
Page 1 of 1

d

zle hz 124

Canadian Tax Principles 2011/2012 - Solutions Manual

Solution To AP Eight - 1

CHAPTER EIGHT SOLUTIONS
Solution to Assignment Problem Eight - 1
Part A
The total cost of the 96 shares remaining on December 31, 2011 would be $2,596. This is calculated in the following table:
Acquisition Or Sale Date

Shares
Purchased (Sold)

Cost
Per Share

Total Cost

Average
Cost/Share

February, 2007
November, 2008
April, 2009

60
90
45

24.00
28.00
30.00

$ 1,440
2,520
1,350

Subtotal
October, 2009
September, 2011

195
( 68)
22

$5,310
( 1,852)
572

$27.23

27.23
26.00

Subtotal
November, 2011

149
( 53)

$4,030
( 1,434)

$27.05

27.05

zle hz December 31, 2011 Balances

96

$2,596

Part B
The average cost of the shares sold during July, 2011 would be calculated as follows:
April, 2010 Purchase [(200)($24)]
December, 2010 Purchase [(160)($33)]

$ 4,800
5,280

Total Cost

$10,080

Average Cost ($10,080 ÷ 360)

$28.00

Proceeds [(260)($36)]
Cost [(260)($28)]
Capital Gain
Inclusion Rate

d

Given this average cost, the taxable capital gain on the July, 2011 sale of shares would be calculated as follows:

Taxable Capital Gain

Canadian Tax Principles 2011/2012 - Solutions Manual

$9,360
( 7,280)
$2,080
1/2
$1,040

125

Solution To AP Eight - 2

Solution to Assignment Problem Eight - 2
2011
For this year, Ms. Houde will have a taxable capital gain calculated as follows:
Proceeds Of Disposition
Adjusted Cost Base

$6,000,000
( 3,500,000)

Capital Gain
Inclusion Rate

$2,500,000
1/2

Taxable Capital Gain

$1,250,000

As no provision can be made for the provided warranty and Ms. Houde has chosen not to use a reserve, this full amount will have to be included in her Net Income For Tax Purposes.

2012
During this year, Ms. Houde will have to include the $250,000 [(5%)($6,000,000 $1,000,000)] of interest in her Net Income For Tax Purposes.
Receipt of the 2012 principal payment has no tax consequences.

zle hz The $400,000 payment to the developer will result in a $200,000 [(1/2)($400,000)] allowable capital loss. If she has no other capital losses during 2012, this amount can be carried back to be used against taxable capital gains in the previous 3 years, including any unused balance of the $1,250,000 taxable capital gain that was recognized on the original sale.
Any loss that is not carried back can be carried forward indefinitely and applied against future capital gains. (Loss carry overs are covered in Chapter 11.)

2013
During this year, the only tax effect will be the inclusion of the $200,000 [(5%($6,000,000 $1,000,000 - $1,000,000)] of interest received in her Net Income For Tax Purposes.

d

2014
At the beginning of 2014, the balance of the loan is $4,000,000. With only $1,000,000 being recovered from the developer, Ms. Houde will have a 2014 allowable capital loss of
$1,500,000 [(1/2)($4,000,000 - $1,000,000)]. If she has other capital gains in 2014, this can be applied to reduce these amounts. If not, the $1,500,000 can be carried back to be used against taxable capital gains in the previous 3 years, including any unused balance of the
$1,250,000 taxable capital gain that was recognized on the original sale.
Any loss that is not carried back can be carried forward indefinitely and applied against future capital gains. (Loss carry overs are covered in Chapter 11.)

Net Effect
Ms. Houde has collected only $3,000,000 of the total principal amount. In addition, this amount has been reduced to $2,600,000 by the required warranty payment. If she had had originally sold the property for this amount, she would have had an allowable capital loss of
$450,000 [(1/2)($2,600,000 - $3,500,000)]. Note that this is the same amount that has resulted from the preceding transactions:

126

2011 Taxable Capital Gain
2012 Allowable Capital Loss
2014 Allowable Capital Loss

$1,250,000
(
200,000)
( 1,500,000)

Net Tax Effect Of Sale

($ 450,000)

Canadian Tax Principles 2011/2012 - Solutions Manual

Solution To AP Eight - 3

Solution to Assignment Problem Eight - 3
Capital Gain And Reserve Limits
The total amount of the taxable capital gain can be calculated as follows:
Proceeds Of Disposition
Adjusted Cost Base

$1,730,000
430,000)

(

Total Capital Gain
Inclusion Rate

$1,300,000
1/2

Total Taxable Capital Gain

$ 650,000

The cash payment schedule is as follows:
Sale Price = Total Proceeds
2011 Payment (30%)
2012 Payment (5%)
2013 Payment (5%)
2014 Payment (5%)
2015 Payment (5%)

Payment

Balance Owing

$519,000
86,500
86,500
86,500
86,500

$1,730,000
1,211,000
1,124,500
1,038,000
951,500
865,000

zle hz With respect to deferring taxes on this amount, under ITA 40(1)(a)(iii), the amount that can be deducted as a capital gains reserve is equal to the lesser of:
·
·

[(Capital Gain)(Proceeds Not Yet Due ÷ Total Proceeds)]
[(Capital Gain)(20%)(4 - Number Of Preceding Years Ending After Disposition)]

The first of these limiting factors is based, as would be expected, on the pattern of collections.
In contrast, the second factor serves to require that at least 20 percent of any gain be recognized in the year of disposition and each subsequent year, regardless of the pattern of cash collections. 2011
The maximum reserve for 2011 would be the lesser of:
·
·

[($1,300,000)($1,211,000 ÷ $1,730,000)] = $910,000
[($1,300,000)(20%)(4 - 0)] = $1,040,000

Total Capital Gain
New Reserve

d

The lesser figure is $910,000, reflecting the fact that the down payment was greater than 20 percent. Given this, the taxable capital gain for 2011 would be calculated as follows:
(

$1,300,000
910,000)

Capital Gain
Inclusion Rate

$ 390,000
1/2

Taxable Capital Gain For 2011

$ 195,000

2012
The maximum reserve for 2012 would be the lesser of:
·
·

[($1,300,000)($1,124,500 ÷ $1,730,000)] = $845,000
[($1,300,000)(20%)(4 - 1)] = $780,000

The lesser figure is $780,000. This reflects the fact that the required recognition of 40 percent exceeds the percentage of the proceeds collected (35%). Given this, the taxable capital gain for 2012 would be calculated as follows:

Canadian Tax Principles 2011/2012 - Solutions Manual

127

Solution To AP Eight - 3
Previous Year’s Reserve
New Reserve

$910,000
( 780,000)

Capital Gain
Inclusion Rate

$130,000
1/2

Taxable Capital Gain For 2012

$ 65,000

2013, 2014 And 2015
At the end of 2013, the proceeds not collected would be $1,038,000 ($1,124,500 - $86,500).
This equals 40 percent of the total proceeds. Further this amount will decline by only 5 percent ($86,500 ÷ $1,730,000) per year. This means that, if you apply the formula based on proceeds not collected, the resulting numbers will be 60 percent for 2013, 55 percent for
2014, and 50 percent for 2015.
In contrast, by using the 20 percent formula, the resulting numbers will be 40 percent for
2013, 20 percent for 2014, and nil for 2015. As these lesser figures must be used in these years, the reserve would decline as follows:
·
·
·

2013 [($1,300,000)(20%)(4 Years - 2 Years)] = $520,000
2014 [($1,300,000)(20%)(4 Years - 3 Years)] = $260,000
2015 [($1,300,000)(20%)(4 Years - 4 Years)] = Nil

zle hz Based on this, taxable capital gain for these three years will be calculated as follows:
2013

Previous Year’s Reserve
New Reserve

2014

2015

$780,000
( 520,000)

$520,000
( 260,000)

$260,000
Nil

Capital Gain
Inclusion Rate

$260,000
1/2

$260,000
1/2

$260,000
1/2

Taxable Capital Gain

$130,000

$130,000

$130,000

At the end of 2015, the entire taxable gain of $650,00 will have been recognized:

Total

128

d

2011
2012
2013
2014
2015

$195,000
65,000
130,000
130,000
130,000
$650,000

Canadian Tax Principles 2011/2012 - Solutions Manual

Solution To AP Eight - 4

Solution to Assignment Problem Eight - 4
Capital Gain
Without regard to the assumptions about the down payment, the total capital gain for Ms.
Gerhardt is $750,000 ($1,350,000 - $600,000). The taxable capital gain is $375,000
[(1/2)($750,000)].
Reserve Limits
Under ITA 40(1)(a)(iii), the amount that can be deducted as a capital gains reserve is equal to the lesser of:
·
·

[(Capital Gain)(Proceeds Not Yet Due ÷ Total Proceeds)]
[(Capital Gain)(20%)(4 - Number Of Preceding Years Ending After Disposition)]

The second part of this formula serves to require that at least 20 percent of the gain be recognized in the year of disposition and each subsequent year, without regard to the pattern of cash collected.

Part A
With a down payment of 15 percent and subsequent annual payments of 5 percent per year, the reserve formula will require that 20 percent of the gain be recognized in each of the years
2011 through 2015.

zle hz This would give a capital gain of $150,000 [(20%)($750,000)] in each of the 5 years. The taxable amount would be $75,000 in each year, for a total taxable capital gain of $375,000.

Part B
With a down payment of $607,500 [(45%)($1,350,000)], the proceeds not yet due are equal to $742,500 ($1,350,000 - $607,500). In 2011 and 2012, the collections are greater than the
20 percent per year rate, and the calculations for these years would be based on actual proceeds as follows:
2011 Capital Gain
2011 Reserve [($750,000)($742,500 ÷ $1,350,000)]

$750,000
( 412,500)

Capital Gain
Inclusion Rate

$337,500
1/2

Taxable Capital Gain For 2011

$168,750

d

2011 Reserve
2012 Reserve [($750,000)($675,000 ÷ $1,350,000)]
Capital Gain
Inclusion Rate
Taxable Capital Gain For 2012

$412,500
( 375,000)
$ 37,500
1/2
$ 18,750

For 2013, she adds the $375,000 reserve into income and deducts a new reserve that is subject to the 20 percent limitation for the first time.
2012 Reserve
2013 Reserve - Lesser Of:
• [($750,000)($607,500 ÷ $1,350,000)] = $337,500
• [($750,000)(20%)(4 - 2)] = $300,000

$375,000
( 300,000)

Capital Gain
Inclusion Rate

$ 75,000
1/2

Taxable Capital Gain For 2013

$ 37,500

Canadian Tax Principles 2011/2012 - Solutions Manual

129

Solution To AP Eight - 4
As of 2014, collections continue to be less than the required 20 percent per year. As a consequence, the amount of the taxable capital gain to be recognized in 2014 and 2015 will be the same $75,000 per year that was established in Part A. The total taxable capital gain in this case is also equal to $375,000.

d

zle hz 130

Canadian Tax Principles 2011/2012 - Solutions Manual

Solution To AP Eight - 5

Solution to Assignment Problem Eight - 5
1. The described treatment is not correct. While Mr. Acker has not sold any property, a part of his building has undergone a change in use from a rental property to a personal property. As a consequence, there will be a deemed disposition at fair market value for that portion of the building that he is occupying, and any resulting capital gain or loss will have to be reflected in his current tax return. If he had not taken CCA on the property, he could have filed an election to postpone the recognition of the capital gain until he sells the property. 2. This interpretation is not correct. No recognition can be given to the estimated cost of the warranty prior to the provision of the warranty services. As a consequence, a capital gain of $33,000 will have to be recognized. However, as the warranty services are provided, the costs of providing the services can be treated as capital losses.
3. The described treatment is correct. Losses on the sale of personal use property such as the table are not deductible. The gain on the painting is not taxable as both the adjusted cost base and the proceeds are less than $1,000.
4. The described treatment is the appropriate one.

zle hz Proceeds Of Disposition ($11,600 - $200)
Adjusted Cost Base ($11,200 - $800)
Capital Gain
Inclusion Rate

Taxable Capital Gain

$11,400
( 10,400)
$ 1,000
1/2
$

500

5. The described treatment is the appropriate one.

d
Canadian Tax Principles 2011/2012 - Solutions Manual

131

Solution To AP Eight - 6

Solution to Assignment Problem Eight - 6
A. Gift To Sally
The result for Bryant would be as follows:
Deemed Proceeds Of Disposition - ITA 69(1)(b)
Adjusted Cost Base

$400,000
( 275,000)

Capital Gain
Inclusion Rate

$125,000
1/2

Taxable Capital Gain

$ 62,500

With respect to the subsequent sale by Sally, the results for her would be as follows:
Proceeds Of Disposition (Actual)
Adjusted Cost Base - ITA 69(1)(c)
Capital Gain

$400,000
( 400,000)
Nil

B. Sale To Sarah
The result for Bryant would be as follows:

zle hz Proceeds Of Disposition (Actual)
Adjusted Cost Base

$400,000
( 275,000)

Capital Gain
Inclusion Rate

$125,000
1/2

Taxable Capital Gain

$ 62,500

C. Sale To Bob
The result for Bryant would be as follows:

Deemed Proceeds Of Disposition - ITA 69(1)(b)
Adjusted Cost Base

$400,000
( 275,000)
$125,000
1/2

Taxable Capital Gain

$ 62,500

d

Capital Gain
Inclusion Rate

With respect to the subsequent sale by Bob, the results for him would be as follows:
Proceeds Of Disposition (Actual)
Adjusted Cost Base (Actual)

$400,000
( 275,000)

Capital Gain
Inclusion Rate

$125,000
1/2

Taxable Capital Gain

$ 62,500

Despite the fact that Bryant has to record the sale at the fair market value of $400,000, Bob’s adjusted cost base would be limited to the $275,000 that he paid for the land. The result would be that Bob would have to include the same $62,500 taxable capital gain that was recorded by Bryant. While Bob would get the benefit of having the $125,000 taxed at a low tax bracket, this will not make up for the fact that the $62,500 taxable capital gain will be subject to double taxation.

132

Canadian Tax Principles 2011/2012 - Solutions Manual

Solution To AP Eight - 6
D. Sale To Norman
The result for Bryant would be as follows:
Proceeds Of Disposition (Actual)
Adjusted Cost Base

$500,000
( 275,000)

Capital Gain
Inclusion Rate

$225,000
1/2

Taxable Capital Gain

$112,500

With respect to the subsequent sale by Norman, the results for him would be as follows:
Proceeds Of Disposition (Actual)
Adjusted Cost Base - ITA 69(1)(a)

$400,000
( 400,000)

Capital Gain

Nil

Despite the fact that Bryant had to record the actual proceeds of $500,000, Norman’s adjusted cost base will be the fair market value of $400,000. This means that he did not achieve his goal of having a capital loss to offset his realized gain.

A.
B.
C.
D.

Sale
Sale
Sale
Sale

To
To
To
To

zle hz Summary
These results can be summarized as follows:

Sally
Sarah
Bob
Norman

Taxable Capital
Gain To Bryan

ACB
To Family
Member

Taxable Capital
Gain To Family
Member

$125,000
125,000
125,000
225,000

$400,000
400,000
275,000
400,000

$

Nil
N/A
62,500
Nil

d
Canadian Tax Principles 2011/2012 - Solutions Manual

133

Solution To AP Eight - 7

Solution to Assignment Problem Eight - 7
Part A
The 2011 tax consequences of the involuntary disposition would include both taxable capital gains and recapture. The amounts would be calculated as follows:
Land
Proceeds Of Disposition:
Sale Price Of Land
Insurance Proceeds For Building
Adjusted Cost Base

Building

$200,000
( 150,000)

(

$1,000,000
750,000)

Capital Gain
Inclusion Rate

$ 50,000
1/2

$ 250,000
1/2

Taxable Capital Gain

$ 25,000

$ 125,000
$ 425,000
(

December 31 UCC Balance
Recapture

($ 325,000)
325,000

zle hz January 1, 2011 UCC Balance
Lesser Of:
• Cost = $750,000
• Proceeds Of Disposition = $1,000,000

January 1, 2012 UCC

750,000)

Nil

For 2011, there is no CCA claim. Instead, there is $325,000 in recaptured CCA that must be taken into income.
As a result of this involuntary disposition, Winding will have an addition to their 2011 Net
Income For Tax Purposes of $475,000 ($25,000 + $125,000 + $325,000)

Part B
After the land and building are replaced in 2012, an election can be made under ITA 44(1), and an amended return can be filed for 2011. In the amended return, the capital gains will be nil, the lesser of the amounts calculated in Part A and the following:

d

Proceeds Of Disposition
Less: Cost Of Replacement Property
Excess, If Any

Land

$200,000
( 300,000)

Building
$1,000,000
( 1,100,000)

Nil

Nil

The deferred amounts will have to be removed from the capital costs of the new assets, resulting in the following revised capital cost values:
New Land
Capital Cost
Capital Gain Deferred By Election
Deemed Capital Cost

(

$300,000
50,000)
$250,000

New Building
(

$1,100,000
250,000)
$ 850,000

These values can also be calculated by taking the old capital costs of $150,000 and $750,000, and adding the additional funds required to replace the old assets ($100,000 for the land and
$100,000 for the building).

134

Canadian Tax Principles 2011/2012 - Solutions Manual

Solution To AP Eight - 7
An election can also be made under ITA 13(4) to amend the 2011 recapture. The calculation would be as follows:
January 1, 2011 UCC Balance
Deduction:
Lesser Of:
• Proceeds Of Disposition = $1,000,000
• Capital Cost = $750,000
Reduced By The Lesser Of:
• Normal Recapture = $325,000
• Replacement Cost = $1,100,000

$425,000

$750,000
( 325,000)

Recapture Of 2011 CCA (Amended)

( 425,000)
Nil

The UCC of the new building will be adjusted for this change as follows:
Deemed Capital Cost Of Building
Deferred Recapture - ITA 13(4) Election
UCC

(

$ 850,000
325,000)
$ 525,000

zle hz This $525,000 can also be calculated as the old UCC of $425,000, plus the $100,000
($1,100,000 - $1,000,000) in funds invested by Winding in excess of the insurance proceeds.

Part C
The CCA claim for 2012 would be calculated as follows:
Opening UCC Balance
Addition of New Building UCC
One-Half Net Additions

Nil
$525,000
( 262,500)

CCA Base
Rate For Class 1

$262,500
4%

CCA For 2012

$ 10,500

d
Canadian Tax Principles 2011/2012 - Solutions Manual

135

Solution To AP Eight - 8

Solution to Assignment Problem Eight - 8
Part A
The 2011 tax consequences would be as follows:
Land

The Company would have a taxable capital gain on the Land calculated as follows:
Proceeds Of Disposition
Adjusted Cost Base

(

$1,720,000
325,000)

Capital Gain
Inclusion Rate

$1,395,000
1/2

Taxable Capital Gain

$ 697,500

Building follows: The Company would have a taxable capital gain and recapture calculated as

Proceeds Of Disposition
Capital Cost

$1,200,000
( 1,100,000)

Capital Gain
Inclusion Rate

$ 100,000
1/2

zle hz Taxable Capital Gain

$

Opening UCC
Deduct Disposition - Lesser Of:
Proceeds Of Disposition = $1,200,000
Capital Cost = $1,100,000

$ 720,000
( 1,100,000)

Negative Closing UCC Balance = Recapture

($ 380,000)

Equipment

50,000

The Company would have recapture calculated as follows:

( 320,000)

Negative Closing UCC Balance = Recapture

($ 80,000)

d

Opening UCC
Deduct Disposition - Lesser Of:
Capital Cost = $620,000
Proceeds Of Disposition = $320,000

$240,000

Part B
Land With respect to the Land, the capital gain resulting from the use of the ITA 44(1) election would be the lesser of:
·
·

$1,395,000 (regular capital gain); and
$770,000 (the excess of the $1,720,000 proceeds of disposition for the old land over the $950,000 cost of the replacement land).

The taxable amount would be $385,000 [(1/2)($770,000)] and this would be included in the revised 2011 Net Income For Tax Purposes.
If the ITA 44(1) election is used in 2012, the deemed adjusted cost base of the replacement land would be calculated as follows:
Cost
Capital Gain Deferred By Election ($1,395,000 - $770,000)
Deemed Adjusted Cost Base Of Replacement Land

136

$950,000
( 625,000)
$325,000

Canadian Tax Principles 2011/2012 - Solutions Manual

Solution To AP Eight - 8
Note that the deemed adjusted cost base of the replacement land has been reduced to the actual adjusted cost base of the old land.
Building If the ITA 44(1) election is used in 2012, the amended 2011 capital gain would be nil, the lesser of:
·
·

$100,000 (regular capital gain); and
Nil (reflecting the fact that there was no excess of the $1,200,000 proceeds of disposition for the old building over the $1,350,000 cost of the replacement building).

If the ITA 13(4) election is used in 2012, the amended 2011 recapture would be calculated as follows: January 1, 2011 UCC Balance
Deduction:
Lesser Of:
• Proceeds Of Disposition = $1,200,000
• Capital Cost = $1,100,000
Reduced By The Lesser Of:
• Normal Recapture = $380,000
• Replacement Cost = $1,350,000

$720,000

$1,100,000
( 380,000)

( 720,000)

Recapture Of 2011 CCA (Amended)

Nil

zle hz If both elections are used in 2012, the UCC of the replacement building is calculated as follows: Cost
Capital Gain Deferred By Election

(

$1,350,000
100,000)

Deemed Capital Cost
Recapture Deferred By Election

(

$1,250,000
380,000)

UCC - Replacement Building

$ 870,000

Note that the UCC for the new building is equal to the UCC of the old building
($720,000), plus the additional $150,000 ($1,350,000 - $1,200,000) in funds required for its acquisition.

d

Equipment As this is a voluntary disposition, the ITA 13(4) and 44(1) elections can only be used on real property (land and buildings). They cannot be used on the equipment and, as a consequence, the $80,000 in recapture will not be altered in the amended return. As the elections cannot be used, both the capital cost and the UCC of the new equipment will be
$475,000.

Part C
After the application of the ITA 44(1) election, there was a $770,000 capital gain on the land and no gain on the building . Some reduction of Net Income For Tax Purposes can be achieved under the ITA 44(6) election. However, the reduction is limited to the $150,000 difference between the $1,200,000 proceeds resulting from the sale of the old building , and the
$1,350,000 cost of the replacement building . This would reduce the capital gain on the land by $150,000. The adjusted cost base of the replacement land would remain at $325,000.
This would still leave the capital gain on the building at nil. This can be shown as follows:
Deemed Proceeds Of Disposition
($1,200,000 + $150,000)
Less: Cost Of Replacement Building
Capital Gain

Canadian Tax Principles 2011/2012 - Solutions Manual

$1,350,000
1,350,000
Nil

137

Solution To AP Eight - 8
Using this election, the amended 2011 Net Income For Tax Purposes would be reduced by
$75,000 [(1/2)($150,000)]. It would be possible to further reduce the gain on the land by transferring more of the proceeds to the building . The result, however, would be a new gain on the building that would be equal to the gain reduction on the land.
Also note that there is a cost involved with this election. While the Company has reduced its
2011 Net Income For Tax Purposes by one-half of the $150,000 capital gain, it has forgone future CCA for the full amount of $150,000.
With the use of this election, the deemed cost of the new building would be $1,100,000
[$1,350,000 - ($1,200,000 + $150,000 - $1,100,000)] and the UCC would be reduced to
$720,000 ($1,100,000 - $380,000).

d

zle hz 138

Canadian Tax Principles 2011/2012 - Solutions Manual

Solution To AP Eight - 9

Solution to Assignment Problem Eight - 9
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.

d

zle hz Canadian Tax Principles 2011/2012 - Solutions Manual

139

Solution To AP Eight - 10

Solution to Assignment Problem Eight - 10
2009 Results
During 2009, 100 percent of the property was used for income producing purposes. As a consequence, the maximum CCA on the building would be $6,000 [($425,000 $125,000)(1/2)(4%)]. This would result in a January 1, 2010 UCC balance of $294,000
($300,000 - $6,000). There are no additional tax consequences during this year.
2010 Results
On January 1, 2010, there would be a deemed disposition/acquisition of 40 percent of the depreciable property. The transaction would be measured using the building’s fair market value of $275,000 ($375,000 - $100,000). Given this, the maximum CCA on the remaining
60 percent would be calculated as follows:
Opening UCC
Deemed Disposition - Lesser Of:
• Capital Cost [(40%)($300,000)] = $120,000
• Deemed Proceeds [(40%)($275,000)] = $110,000

$294,000
( 110,000)

CCA Base
Maximum CCA [(4%)($184,000)]

(

zle hz UCC - January 1, 2011

$184,000
7,360)
$176,640

While the value of the building has declined from $300,000 ($425,000 - $100,000) to
$275,000 ($375,000 - $100,000), no loss can be recognized. As there is still an asset in the
Class, a terminal loss cannot be recognized. In addition, we would remind you that you cannot have a capital loss on a depreciable asset disposition.
There is, however, an allowable capital loss on the land of $5,000 [(40%)(1/2)($125,000 $100,000)]. This loss can only be deducted against taxable capital gains on other dispositions.
The cost to Mr. Lessard of the 40 percent of the property that is being used for personal purposes would be $150,000 [(40%)($375,000)], with $110,000 of that allocated to the building .

d

2011 Results
On January 1, 2011, there would be a deemed acquisition of 40 percent of the depreciable property. The capital cost of the acquisition would be $126,000 [(40%)($450,000 $135,000)]. However, as the change is from personal use to business use and the fair market value of the building is greater than his cost, the UCC will be limited to his cost plus one-half of the difference between fair market value and cost or $118,000 [$110,000 + (1/2)($126,000 $110,000)].
Maximum CCA for would be calculated as follows:
Opening UCC
Deemed Acquisition
[$110,000 + (1/2)($126,000 - $110,000)]
Deduct: One-Half Net Additions [(1/2)($118,000)]
CCA Base
Maximum CCA [(4%)($235,640)]
Add: One-Half Net Additions
UCC - January 1, 2012

140

$176,640
(
(

118,000
59,000)
$235,640
9,426)
59,000
$285,214

Canadian Tax Principles 2011/2012 - Solutions Manual

Solution To AP Eight - 10
As a result of the deemed disposition, Mr. Lessard would have a taxable capital gain on both the land and the building . They would be calculated as follows:
Land
Proceeds Of Disposition
[(40%)($135,000)]
[(40%)($315,000)]
Adjusted Cost Base [(40%)($100,000)]
Capital Cost [(40%)($275,000)]

Building

$54,000
$126,000
( 40,000)
( 110,000)

Capital Gains
Inclusion Rate

$14,000
1/2

$ 16,000
1/2

Taxable Capital Gains

$ 7,000

$

8,000

It is likely that these gains could be eliminated by the principal residence exemption.

d

zle hz Canadian Tax Principles 2011/2012 - Solutions Manual

141

Solution To AP Eight - 11

Solution to Assignment Problem Eight - 11
Ms. Doan’s taxable capital gain on deemed dispositions resulting from her departure from
Canada would be calculated as follows:
ABC Ltd. Shares ($86,000 - $42,000)
Vacant Land (Note 1)
Power Corporation Shares ($72,000 - $38,000)
TD Bank Shares ($72,000 - $84,000)
Sailboat (Note 2)
Oil Painting ($11,000 - $5,000)
Stamp Collection (Note 3)

$44,000
N/A
34,000
( 12,000)
N/A
6,000
( 6,000)

Capital Gain
Inclusion Rate

$66,000
1/2

Taxable Capital Gain On Departure

$33,000

zle hz Note 1 Real property is exempted from the ITA 128.1(4)(b) deemed disposition requirement. However, as it is taxable Canadian property, a later sale of this land will attract Canadian income taxes, even though Ms. Doan is no longer a Canadian resident.
Note 2

Losses on personal use property are not deductible.

Note 3 Both the oil painting and the stamp collection are listed personal property.
While there is a $9,000 ($12,000 - $3,000) loss on the stamp collection, it can only be deducted to the extent of the $6,000 gain on the oil painting .

d
142

Canadian Tax Principles 2011/2012 - Solutions Manual

Solution To AP Eight - 12

Solution to Assignment Problem Eight - 12
Note To Instructor Part B of this problem requires knowledge of ITA 13(21.1) as there is a capital gain on the land and a terminal loss on the building .

Case A(1)
Assuming that the transfer was to Ms. Kneebone’s common-law partner, the land would have been transferred at its cost and the building would have been transferred at its UCC. As a consequence, there would have been no tax effects to be included in Ms. Kneebone’s final return. The building would have been transferred at Ms. Kneebone’s UCC of $234,000. Alice would have taken maximum CCA of $9,360 [(4%)($234,000)] for 2011 leaving a UCC of $224,640.
The tax effects that would occur at the time of the 2012 sale of the property would be as follows: Land
Proceeds Of Disposition
Adjusted Cost Base/Capital Cost

$408,000
( 330,000)

$254,000
1/2

$ 78,000
1/2

zle hz Capital Gain
Inclusion Rate

Taxable Capital Gain

Building

$376,000
( 122,000)

$127,000

$ 39,000

UCC
Deduct Disposition - Lesser Of:
• Capital Cost = $330,000
• Proceeds Of Disposition = $408,000

$224,640
( 330,000)

Negative Closing UCC Balance = Recaptured CCA

($105,360)

A total of $271,360 ($127,000 + $39,000 + $105,360) would be added to the 2012 Net
Income For Tax Purposes of Alice.

d

Case A(2)
As the transfer was to her son, 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 Ms. Kneebone’s final return:
Building

Deemed Proceeds
Adjusted Cost Base/Capital Cost

$425,000
( 122,000)

$451,000
( 330,000)

Capital Gain
Inclusion Rate

$303,000
1/2

$121,000
1/2

Taxable Capital Gain

$151,500

$ 60,500

Land

UCC
Deduct Disposition - Lesser Of:
• Capital Cost = $330,000
• Deemed Proceeds = $451,000

( 330,000)

Negative Closing UCC Balance = Recaptured CCA

($ 96,000)

Canadian Tax Principles 2011/2012 - Solutions Manual

$234,000

143

Solution To AP Eight - 12
A total of $308,000 ($151,500 + $60,500 + $96,000) would be added to Ms. Kneebone’s
2011 Net Income For Tax Purposes.
With respect to her son’s tax records, the land will have a tax cost of $425,000 and the building will be a Class 1 asset with a tax cost equal to Mrs. Kneebone’s deemed proceeds of
$451,000.
Maximum 2011 CCA is $18,040 [($451,000)(4%)], leaving a UCC of $432,960 ($451,000 $18,040). 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.
Since there cannot be a capital loss on depreciable property and the building is the only asset in the class, the 2012 tax effects associated with the sale of the building would be calculated as follows: Land

Building

Proceeds Of Disposition
Adjusted Cost Base
Capital Cost Limited To Proceeds

$376,000
( 425,000)

$408,000

Capital Gain (Loss)
Inclusion Rate

($ 49,000)
1/2

Nil
1/2

Allowable Capital Loss

($ 24,500)

Nil

( 408,000)

zle hz UCC
Deduct Disposition - Lesser Of:
• Capital Cost = $451,000
• Proceeds Of Disposition= $408,000

$432,960
( 408,000)

Positive Closing UCC Balance = Terminal Loss

$ 24,960

A total of $49,460 would be deducted from the 2012 Net Income For Tax Purposes of Chester as the problem indicates that he has sufficient income and taxable capital gains.

Comparison Case A(1) And A(2)
The overall tax consequences in the two cases are as shown in the following table:
Case A(1)
Alice

($

Net Income For Tax Purposes (Loss)

Nil
9,360)
271,360

$262,000

Case A(2)
Chester

$308,000

Nil
($18,040)
( 49,460)

$308,000

($67,500)

d

2011
2011 - CCA Taken
2012

Case A(2)
Ms. Kneebone

There is a difference in the Case A(1) and Case A(2) results of $21,500 [$262,000 - ($308,000
-$67,500)]. This reflects the fact that, in Case A(2), a portion of the amount that was taxed as a capital gain (50 percent) in Ms. Kneebone’s final return was deducted by Chester as CCA and a terminal loss (100 percent).
This can be shown in the following calculation:
Actual Sale Price Of Building For Chester
Fair Market Value (Deemed Proceeds) At Death

$408,000
( 451,000)

Amount Deducted By Chester As CCA And Terminal Loss
($ 43,000)
Portion Taxed As Capital Gain In Final Return [(1/2)($43,000)]
21,500
Difference

144

($ 21,500)

Canadian Tax Principles 2011/2012 - Solutions Manual

Solution To AP Eight - 12
Part B
If the proceeds of the sale of the property by Chester were allocated $435,000 to the land and
$349,000 to the building , the tax effects associated with the sale of the building would be initially calculated as follows:
Land
Proceeds Of Disposition
Adjusted Cost Base
Capital Cost Limited To Proceeds

$435,000
( 425,000)

Building
$349,000
( 349,000)

Capital Gain
Inclusion Rate

$ 10,000
1/2

Nil
1/2

Taxable Capital Gain

$

Nil

5,000

UCC
Deduct Disposition - Lesser Of:
• Capital Cost = $451,000
• Proceeds Of Disposition= $349,000

$432,960
( 349,000)

Positive Closing UCC Balance = Terminal Loss

$ 83,960

zle hz Since there is a capital gain on the land and a terminal loss on the building , ITA 13(21.1)(a) requires the deemed proceeds of disposition for the building to be determined as follows:
The Lesser Of:
•

•

The FMV of the land and building
Reduced By The Lesser Of:
• The ACB of the land = $425,000
• The FMV of the land = $435,000

$784,000

( 425,000)

The Greater Of:
• The FMV of the building = $349,000
• The Lesser Of:
The cost of the building = $451,000
The UCC of the building = $432,960

$359,000

$432,960

d

The proceeds that would be allocated to the building would be $359,000, leaving $425,000
($784,000 - $359,000) to be allocated to the land. The net result is that the terminal loss would be reduced by $10,000 (the amount of the potential capital gain) to $73,960
($359,000 - $432,960) and the capital gain would be nil ($425,000 - $425,000).

Canadian Tax Principles 2011/2012 - Solutions Manual

145

Solution To AP Eight - 13

Solution to Assignment Problem Eight - 13
The annual gain on the country home was $18,125 ($290,000 ÷ 16). On the condominium, the annual gain is $28,750 [($230,000 ÷ 8). This would indicate that the maximum number of years should be allocated to the condominium. However, because of the plus 1 in the reduction formula, one year can be left off.
Based on this analysis, the seven years 2005 through 2011 should allocated to the condominium, with the nine years 1996 through 2004 being allocated to the country home.
The required calculations are as follows:
Country Home
Proceeds Of Disposition
Adjusted Cost Base
Real Estate Commissions
[(5%)($1,200,000)]
[(5%)($900,000)]

(

$1,200,000
850,000)

(

60,000)

Condominium
$900,000
( 625,000)
(

$ 290,000

$230,000

( 181,250)

zle hz Total Capital Gain
Exemption:
Country Home
[$290,000][(9 + 1) ÷ 16]
Condominium
[$230,000][(7 + 1) ÷ 8]

45,000)

( 230,000)

Capital Gain
Inclusion Rate

$108,750
1/2

Nil
N/A

Taxable Capital Gain

$ 54,375

Nil

This gives a total taxable capital gain on the two properties of $54,375.

d
146

Canadian Tax Principles 2011/2012 - Solutions Manual

Solution To AP Eight - 14

Solution to Assignment Problem Eight - 14
Personal Use Property (Automobile, Boat, and Desk)
While gains on the disposition of personal use property are taxable, losses are not deductible.
This means that, because there is a loss on this property, selling the sailboat would have no effect on Mr. Firenza’s Net Income For Tax Purposes. However, the gains on both the automobile and the desk would be subject to tax. These gains would be calculated as follows:
Automobile

Desk

$320,000

$2,200

Proceeds Of Disposition
Adjusted Cost Base
($135,000 + $42,000)
Adjusted Cost Base ($1,000 Floor)

( 177,000)
( 1,000)

Capital Gain
Inclusion Rate

$143,000
1/2

$1,200
1/2

Taxable Capital Gain

$ 71,500

$ 600

zle hz Listed Personal Property (Coin Collection, Manuscript, Painting)
With respect to listed personal property, gains are taxable and losses are deductible.
However, the losses can only be deducted against gains resulting from the disposition of listed personal property. Given this, the addition to Mr. Firenza’s Net Income For Tax Purposes would be calculated as follows:
Gain On Coin Collection ($23,500 - $17,600)
Gain On Painting [(80%)($350,000) - $275,000]
Total Gain
Loss On Manuscript (Note 1)

Addition to Net Income For Tax Purposes

$5,900
5,000
$10,900
( 10,900)
Nil

d

Note 1 The total loss on the manuscript is $33,500 ($8,500 - $42,000). However, it can only be deducted to the extent of the gains on other listed personal property dispositions. The remaining loss of $22,600 ($33,500 - $10,900) can be carried over to other years. While this is not covered in Chapter 8, such losses can be carried back
3 years and forward for 7 years.

Canadian Tax Principles 2011/2012 - Solutions Manual

147

Solution To AP Eight - 15

Solution to Assignment Problem Eight - 15
The taxable capital gain on the sale of securities and the conversion to Canadian dollars would be calculated as follows:
Proceeds Of Disposition [(5,000)(£32)($1.57)]
Adjusted Cost Base [(5,000)(£25)($1.64)]
Capital Gain On Sale Of Securities

$251,200
( 205,000)

Converted Dollars - June [(5,000)(£32)($1.62)]
Proceeds Of Disposition [(5,000)(£32)($1.57)]
Capital Gain On Foreign Exchange
ITA 39(2) Deduction
Net Foreign Exchange Gain

$259,200
( 251,200)
$ 8,000
(
200)

$46,200

7,800

Total Capital Gains
Inclusion Rate

$54,000
1/2

Taxable Capital Gains

$27,000

zle hz There is a foreign exchange gain under ITA 39(2), resulting from the increase in the value of the British pound between June and December of 2011. As Mr. Levitt is an individual, he is eligible to deduct the first $200 of foreign exchange gains under ITA 39(2).
As the securities would be considered capital assets, this net foreign exchange gain of $7,800 would be a capital gain.
Mr. Levitt’s income inclusion for 2011 would be $27,000.

d
148

Canadian Tax Principles 2011/2012 - Solutions Manual

Solution To AP Eight - 16

Solution to Assignment Problem Eight - 16
Employment Income
The required calculations here would be as follows:
Salary
Commissions
One-Half Total Bonus (Amount Paid In 2011)
Expense Allowance [(12)($2,500)]
RPP Contributions
Professional Association Dues
Automobile Costs
CCA (Note 1)
Operating Costs [(80%)($6,300)]
Hotel Costs
Airline And Other Transportation
Business Meals And Entertainment [(1/2)($9,300)]
Home Office Expenses (Note 2)
Stock Option Benefit [(500)($108 - $92)]
Net Employment Income

$136,000
43,000
11,000
30,000
(
4,200)
(
1,500)
(
(
(
(
(
(

6,120)
5,040)
9,700)
5,400)
4,650)
978)
8,000
$190,412

zle hz Note 1 The 2011 CCA would be based on a UCC calculated as though 100 percent of the available CCA had been taken in 2010. The 100 percent CCA of the Class 10.1 vehicle for 2010 would be $4,500 [(1/2)(30%)($30,000)]. Using this figure, the 2011
CCA would be $6,120 [(80%)(30%)($30,000 - $4,500)].
Note 2 As Lorenzo has commission income, he can deduct 12 percent of all of the costs except the mortgage interest. This will provide a deduction of $978
[(12%)($1,250 + $1,300 + $5,600)].

Property Income
The required calculations here would be as follows:

$ 8,870
1,200
4,200
1,722

Total Property Income

$15,992

d

Net Rental Income (Note 3)
Income Trust Distribution [(500)($2.40)]
Eligible Dividends
Gross Up On Eligible Dividends [(41%)($4,200)]

Note 3 As the change in use is from personal to business, the base for calculating
CCA would be as follows:
Cost Of Building ($105,000 - $42,000)
Fair Market Value At Change In Use
($350,000 - $100,000)
Cost
Increase In Value
Inclusion Factor

$63,000
(

$250,000
63,000)
$187,000
1/2

Cost For UCC And CCA Purposes
One-Half Net Additions

93,500
$156,500
( 78,250)

CCA Base
Rate For Class 1

$ 78,250
4%

CCA

$

3,130

Using this CCA figure, net rental income for 2011 would be $8,870 ($12,000 - $3,130).

Canadian Tax Principles 2011/2012 - Solutions Manual

149

Solution To AP Eight - 16
Net Taxable Capital Gains
The required calculations here would be as follows:
Stock Option Shares [(500)($115 - $108)]
Sculpture (Note 4)
Cottage - Land ($100,000 - $42,000)
Cottage - Building ($250,000 - $63,000)

$
$ 58,000
187,000

245,000

Real Property Income Trust (Note 5)
Land Sale ($180,000 - $78,000)
Reserve For Land Sale (Note 6)

3,500
38,000

2,161
$102,000
( 71,400)

30,600

Net Capital Gains
Inclusion Rate

$319,261
1/2

Net Taxable Capital Gains

$159,631

Note 4 As this was a non-arm’s length disposition, ITA 69 is applicable. As the property was sold for less than its fair market value, Lorenzo will have deemed proceeds equal to the fair market value of $41,000. This results in a gain of $38,000 ($41,000 $3,000).

zle hz Note 5 The $1,200 income trust distribution was used to acquired 20.51 additional units ($1,200 ÷ $58.50). Using this figure, the capital gain calculation would be as follows: Proceeds Of Distribution [(520.51)($60.25)]
Adjusted Cost Base [(500)($56) + $1,200)]

$31,361
( 29,200)

Capital Gain

$ 2,161

Note 6 The gain on the land would be $102,000 ($180,000 - $78,000). The maximum reserve would be $71,400, the lesser of:
·
·

$81,600 [(20%)($102,000)][4 - 0]
$71,400 [($102,000)($126,000 ÷ $180,000)]

Net Employment Income
Property Income
Net Taxable Capital Gains

d

Net And Taxable Income
The required calculations here would be as follows:

Net Income For Tax Purposes
Stock Option Deduction [(1/2)($8,000)]
Taxable Income

150

$190,412
15,992
159,631
(

$366,035
4,000)
$362,035

Canadian Tax Principles 2011/2012 - Solutions Manual

Solution To AP Eight - 16
Federal Tax Payable
The required calculations here would be as follows:
Tax On First $128,800
Tax On Next $233,235 ($362,035 - $128,800) At 29 Percent

$27,256
67,638

Tax Before Credits
Tax Credits:
Basic Personal Amount
($10,527)
Spouse ($10,527 - $6,300)
( 4,227)
Child [(2)($2,131)]
( 4,262)
Anita’s Disability
( 7,341)
Disability Supplement
( 4,282)
Transfer Of Education Credits (Note 7) ( 5,000)
Fitness Program (Note 8)
( 1,500)
Medical Expenses (Note 9)
( 15,573)
EI
(
787)
CPP
( 2,218)
Canada Employment Credit
( 1,065)

$94,894

Total Credit Base
Rate

($56,782)
15%

zle hz Subtotal
Charitable Donations Credit
[(15%)($200) + (29%)($2,400 - $200)]
Dividend Tax Credit [(13/23)($1,722)]
Federal Tax Payable

(

8,517)
$86,377

(
(

668)
973)
$84,736

Note 7 The transfer of Maria’s tuition, education and textbook credits would be
$5,000, the lesser of:
•
•

$5,000
[$9,300 + (8)($400) + (8)($65)] = $13,020

Note 9

d

Note 8 Mr. Desoto can claim the fitness fees to a maximum of $500 for each child.
In addition, he can claim the $500 supplement that is available because his daughter is under 18 and qualifies for the disability credit. This results in a total of $1,500
[(2)($500) + $500].
The base for the medical expense tax credit would be calculated as follows:

Total Medical Expenses
Lesser Of:
• [[(3%)($362,035))] = $10,861
• 2011 Threshold Amount = $2,052

$17,625

Medical Expense Tax Credit Base

$15,573

Canadian Tax Principles 2011/2012 - Solutions Manual

( 2,052)

151

Solution To AP Eight - 17

Solution to Assignment Problem Eight - 17
Net Income For Tax Purposes
The required calculations here are as follows:
Net Business Income
Accounting Income Before Taxes
Accounting Amortization
CCA (Note 1)
Landscaping Costs (Note 2)
One-Half Meals And Entertainment [(1/2)($27,600)]
Charitable Donations
Political Contributions
Warranty Costs (Note 3)
Net Business Income

$196,000
29,000
( 39,475)
( 30,000)
13,800
5,500
700
(
4,500)
$171,025

Note 1 The relevant CCA calculations are as follows:
$ 83,000
63,250

CCA Base
Rate

$100,375
20%

Class 8 CCA
Class 1 CCA [(4%)($275,000)]
Class 10 CCA [(30%)($28,000)]

$ 20,075
11,000
8,400

Total

$ 39,475

zle hz Opening UCC - Class 8
Additions
Dispositions - Lesser Of:
Cost = $46,000
Proceeds Of Disposition = $28,500
One-Half Net Additions [(1/2)($63,250 - $28,500)]

( 28,500)
( 17,375)

d

Note 2 Landscaping costs can be deducted under ITA 20(1)(aa) when paid. As $3,000 ($30,000 ÷ 10) was charged to accounting income as amortization, but was added back in the calculation of net business income, the adjustment is for the total amount of $30,000.
Note 3 Since the liability for warranty costs decreased during the year, the actual expenditures for warranty costs must have been greater than the amount expensed for accounting purposes. As a result, there is a deduction from net business income for the $4,500
($22,000 - $17,500) difference between the opening and ending liability. Stated alternatively, the opening balance of $22,000 can be deducted for tax purposes, while the closing balance of $17,500 cannot be deducted. To adjust accounting income, we required a net deduction of $4,500.

Deductible CPP Contributions
[(1/2)($4,436)]

152

$2,218

Canadian Tax Principles 2011/2012 - Solutions Manual

Solution To AP Eight - 17
Taxable Capital Gain On Vacant Land
Proceeds Of Disposition
Adjusted Cost Base

$85,000
( 33,000)

Capital Gain
Reserve - Lesser Of:
[($52,000)($50,000 ÷ $85,000)] = $30,588
[($52,000)(20%)(4 - 0)] = $41,600

$52,000
( 30,588)

Balance
Inclusion Rate

$21,412
1/2

Taxable Capital Gain

$10,706

Capital Gain On Change In Use
ITA 45(1) Deemed Proceeds Of Disposition
Adjusted Cost Base

(

$375,000
25,000)

Capital Gain Before Exemption
Principal Residence Exemption (Note 4)

$350,000
( 155,556)
$194,444
1/2

Taxable Capital Gain

$ 97,222

zle hz Capital Gain
Inclusion Rate

Note 4 Mr. Bosch can designate the property as his principal residence for the years 2003 through 2005. Given this and the fact that he has owned the cottage for 9 years (2003 through 2011), his exemption is equal to $155,556 {[($350,000)(3 + 1)] ÷ 9}. Also note that, because he intends to deduct CCA, he cannot make the ITA 45(2) election not to have a change in use.
Allowable Capital Loss On Low Tech Ltd. Shares

$ 1,375
( 22,061)

Capital Loss
Inclusion Rate

($20,686)
1/2

Allowable Capital Loss

d

Proceeds Of Disposition [(275)($5)]
Adjusted Cost Base (Note 5)

($10,343)

Note 5 The average cost of the shares held would be $80.22 per share {[(150)($55) + (125)($75) + (300)($95)] ÷ 575}. Based on this value, the adjusted cost base of the shares sold would be $22,061
[(275)($80.22)].
Net Rental Income

Net rental income would be calculated as follows:

Rent Revenues
Rent Expenses Other Than CCA
CCA (Note 6)
Net Rental Income

(
(

$12,000
3,200)
2,950)
$ 5,850

Note 6 Maximum CCA would be calculated as follows:

Canadian Tax Principles 2011/2012 - Solutions Manual

153

Solution To AP Eight - 17
Cost Of Building ($25,000 - $5,000)
Bump Up [(1/2)($375,000 - $100,000 - $20,000)]
UCC
One-Half Net Additions [(1/2)($147,500)]

$ 20,000
127,500
(

$147,500
73,750)

CCA Base
Rate

$ 73,750
4%

Maximum CCA

$

2,950

Net Income For Tax Purposes
Net Business Income
CPP Contributions (Subdivision e Deduction)
Net Taxable Capital Gains
($10,706 + $97,222 - $10,343)
Net Rental Income
Net Income For Tax Purposes

(

$171,025
2,218)
97,585
5,850
$272,242

zle hz Taxable Income
As there are no Taxable Income deductions available, Mr. Bosch’s Taxable Income is equal to his Net Income For Tax Purposes.
Balance Owing
The required calculations here would be as follows:

$27,256
41,598

Tax Before Credits
Tax Credits:
Basic Personal Amount
Common-Law Partner
Child [(2)($2,131)]
CPP [(1/2)($4,436)]
Chris’s Disability
Chris’s Disability Supplement
Medical Expenses (Note 7)

$68,854

($10,527)
( 10,527)
( 4,262
( 2,218)
( 7,341)
( 4,282)
( 19,193)

Total Credit Base
Rate

($58,350)
15%

d

Tax On First $128,800
Tax On Next $143,442 ($272,242 - $128,800) At 29 Percent

Subtotal
Charitable Donations Credit
[(15%)($200) + (29%)($5,500 - $200)]
Political Donations [(3/4)($400) + (1/2)($300)]
CPP Payable
Balance Owing (Federal)
Note 7

154

(

8,753)
$60,101

(
(

1,567)
450)
4,436
$62,520

The base for the medical expense tax credit would be as follows:

Total Medical Expenses
Lesser Of:
• [[(3%)($272,242)] = $8,167
• 2011 Threshold Amount = $2,052

$21,245

Medical Expense Tax Credit Base

$19,193

( 2,052)

Canadian Tax Principles 2011/2012 - Solutions Manual

Solution To AP Tax Software Chapter 8

Solution to Problem For Tax Software Chapter 8
This solution includes selected schedules and worksheets from the ProFile T1 return.
Note that the program can only be used to calculate 2010 (not 2011) tax returns and the problem and solution reflect this fact.
The tax return is available on the Instructor’s Resource CD-ROM under the heading
“Tax Software Assignment Problems”. The ProFile version contains the complete return. The .PDF version contains only the schedules required in the problem.
·

To view the .PDF file that contains the required schedules, select the file “PDF
Software Problem Chapter 8” from the PDF Format drop-down list.

·

To view the ProFile file of the complete tax return, select the file “Software
Problem Chapter 8” from the ProFile Format drop-down list.

For more information on how to use the ProFile tax program, please refer to the sample tax returns in the Study Guide.
The adjusted cost base of the Extreme Wi-Fi Technologies shares are calculated using the average cost as follows:

zle hz Shares
Purchased (Sold)

Cost
Per Share

1,500
2,000

$ 2.00
12.00

$ 3,000
24,000

3,500
(1,000)
400

$27,000
( 7,710)
10,000

$ 7.71

( 7.71)
25.00

Subtotal
January 6, 2010
February 1, 2010

2,900
( 800)
800

$29,290
( 8,080)
16,000

$10.10

( 10.10)
20.00

Subtotal
March 14, 2010

2,900
( 600)

$37,210
( 7,698)

$12.83

( 12.83)

$29,512

$12.83

Acquisition Date
April 1, 2008
October 1, 2008
Subtotal
April 1, 2009
June 1, 2009

December 31, 2010 Balances

Average
Cost/Share

Total Cost

2,300

d

The superficial loss rules are not applicable to the January 6 sale as there were no losses.
The taxable capital gains and losses on the securities are as follows:
Disposition 1
Proceeds Of Dispositions
Adjusted Cost Base
Selling Costs

(
(

$11,806
8,080)
29)

Disposition 2
(
(

Disposition 3

$13,465
7,698)
29)

$2,982
( 5,300)
N/A

Capital Gain (Loss)
Inclusion Rate

$ 3,697
1/2

$ 5,738
1/2

($2,318)
1/2

Taxable Capital Gain

$ 1,849

$ 2,869

($1,159)

Canadian Tax Principles 2011/2012 - Solutions Manual

155

Solution To AP Tax Software Chapter 8
The jewelry is classified as listed personal property. The dining room set and chandelier are classified as personal use property. As a result, the loss realized on the dining room set cannot be recognized. For the capital gain and loss calculations for both listed personal property and personal use property, a minimum value of $1,000 applies to both the proceeds of disposition and the adjusted cost base. Since the gold ring has proceeds of disposition and an adjusted cost base of less than $1,000, there is no gain or loss on the sale of the ring . The gain and loss calculations are as follows:
Diamond Pendant

Pearl Brooch

Chandelier

Proceeds Of Disposition
(Minimum = $1,000)
Adjusted Cost Base
(Minimum = $1,000)

$4,000

$1,300

$ 1,500

( 5,800)

( 1,000)

( 1,000)

Capital Gain (Loss)
Inclusion Rate

($1,800)
1/2

$

300
1/2

$ 500
1/2

Taxable Capital Gain (Allowable Loss)

($ 900)

$

150

$ 250

zle hz As losses on listed personal property can only be claimed against gains on such property, the unused allowable capital loss of $750 ($900 - $150) cannot be applied in the current year.
However, the loss will be available for carry overs to other years. As covered in Chapter 11, the loss can be carried back three years and forward seven years.
The total taxable capital gain is $3,809 ($1,849 + $2,869 - $1,159 + $250).
Changes to the Summary form from the previous version, excluding calculated amounts other than Balance Owing (Refund).
Summary Line Changed

Mary

Seymour

Chapter 8

Taxable capital gains

3,809

Balance Owing (Refund)

4,077

9,951

d
156

Canadian Tax Principles 2011/2012 - Solutions Manual

Tax Software Assignment Problem - Chapter 8
Walford, Mary-Chap 8P SIN: 527 000 129

Summary

2010 Tax Summary (Federal)
Mary-Chap 8P

Total income
Employment *
Old Age Security
CPP/QPP benefits
Other pensions
Split-pension amount
Universal Child Care Benefit
Employment Insurance
Taxable dividends
Interest
Limited partnership
RDSP
Rental
Taxable capital gains
Support payments
RRSP
Other
Self-employment *
Workers' compensation and social assistance

101
113
114
115
116
117
119
120
121
122
125
126
127
128
129
130
135

147
Total income 150
207
208
210
212
213
214
215
217
219
220
221
222
224
229
235
231
Net income 236

1,866
1,671

3,809

215

160,427

Total payable
Federal tax
Non-refundable tax credits
Dividend tax credit
Min. tax carry-over/other *

404
350
425
426
Basic federal tax 429

Non resident surtax
Foreign tax credits / other

2011 Estimated
GST/HST credit
Child Tax Benefit
RRSP contribution limit
More than one line is considered

405
406
410
414
417
415
418
Net federal tax 420
CPP contributions payable
421
42,406 EI self-employment
430
Social benefits repayment
422
Provincial/territorial tax
428
Total payable 435
Federal tax
Political/inv. tax credit/other *
1,373 Labour-sponsored tax credit
2,091 Alternative minimum tax
WITB Prepayment (RC210)
Additional tax on RESP

160,427

244
248
249
250
251
254
255
256
Taxable income 260

*

300
301
303
367
306
308
363
364
365
369
313
314
316
318
319
323
332
Subtotal 335
338
Credit at 15%
45,870 Donations and gifts
349
Non-refundable tax credits 350

d

Taxable income
Canadian Forces personnel
Home relocation loan
Security options deductions
Other payments deduction
Losses of other years *
Capital gains deduction
Northern residents
Additional deductions

152,866

Mary-Chap 8P

Non-refundable tax credits
Basic personal amount
Age amount
Spouse / eligible dependant *
Amount for children
Infirm/caregiver *
CPP/QPP/PPIP/EI *
Canada employment amount
Public transit passes amount
118 Children's fitness amount
Home buyers/Home renovation *
Adoption expenses
Pension income amount
Disability amount
Transfers *
Interest on student loans
Tuition / education
45,752 Medical expenses

zle hz Net income
RPP
RRSP *
Split-Pension Deduction
Union and professional dues
UCCB repayment
Child care expenses
Disability supports deduction
Business investment loss
Moving expenses
Support payments
Carrying charges and interest
CPP/QPP/PIPP *
Exploration and development
Employment expenses
Social benefits repayment
Other deductions *

Seymour-Chap 8P

Total credits
Income tax deducted *
QC or YT abatement *
CPP/EI overpayment *
Medical expense supplement
WITB (Schedule 6)
160,427
42,406 Other credits *
GST/HST rebate
Mary-Chap 8P
Seymour-Chap 8P
Instalments
Provincial tax credits
Total credits

22,450 00

8,235

Balance owing (refund)
Combined balance (refund)

437
440
448
452
453
454
457
476
479
482

Seymour-Chap 8P

10,382

10,382

2,101
2,911
1,051

2,091

3,595
14,344
2,152
2,152

18,169
2,725
480
3,205

36,568
2,152
335

6,462
3,205

34,081

3,257

37
34,044

3,257

34,044

3,257
4,183

18,698
52,742

2,511
9,951

48,665

48,665
4,077

9,951

14,028

Complete Return Available On Instructor's CD-ROM
157

Page 1 of 1

Tax Software Assignment Problem - Chapter 8
Walford, Mary-Chap 8P SIN: 527 000 129

T1-2010

Capital Gains (or Losses) in 2010

Schedule 3

Read line 127 in the General Income Tax and Benefit Guide. For more information, read Chapter 2 in guide T4037, Capital Gains.
Attach a copy of this schedule to your return.
Note: If you have a business investment loss, see line 217 in the General guide.

(1)
Year of acquisition (2)
Proceeds of disposition

(3)

(4)

(5)

Adjusted cost base

Outlays and expenses
(from dispositions)

Gain (or loss)
(column 2 minus columns 3 and 4)

1. Qualified small business corporation shares (report, in "3" below, publicly traded shares, mutual fund units, deferral of eligible small business corporation shares, and other shares.)
Number

Name of corp. and class of shares

From T3/T5013 slips
Total 106

Gain (or loss) 107

2. Qualified farm property and qualified fishing property
Address or legal description

Prov./Terr.

From T3/T5013 slips
Total 109
Mortgage foreclosures and conditional sales repossessions - Address or legal description

Gain (or loss) 110

Prov./Terr.

From T5013 slips

Number

zle hz Total 123
Gain (or loss) 124
3. Publicly traded shares, mutual fund units, deferral of eligible small business corporation shares, and other shares
(Report capital gains or losses shown on T5, T5013, T5013A, T4PS and T3 information slips on line 174 or 176)
Name of fund/corp. and class of shares

800 Extreme Wi-Fi Technologies
600 Extreme Wi-Fi Technologies
258 Fidelity Small Cap Fund
From T5008 slips
From T1170

2008
2008
2005

Total 131

11,806 00
13,465 00
2,982 31

8,080 00
7,698 00
5,300 00

28,253 31

29 00
29 00

Gain (or loss) 132

3,697 00
5,738 00
(2,317 69)

7,117 31

4. Real estate, depreciable property, and other properties
Address or legal description

Prov./Terr.

Total 136

Gain (or loss) 138

5. Bonds, debentures, promissory notes, and other similar properties
Face value

Maturity date

From T1170

Name of issuer

Total 151

Gain (or loss) 153

Address or legal description

Prov./Terr.

Total 154
7. Personal-use property (full description)
Dining room set ($1,000 min proceeds)
Chandelier

2005
2005

d

6. Other mortgage foreclosures and conditional sales repossessions

1,000 00
1,500 00

Gain (or loss) 155

3,000 00
1,000 00
Gain only 158

8. Listed personal property (LPP) (full description)
Diamond Pendant
Pearl Brooch
Note: You can only apply LPP losses against LPP gains.

2005
2005

4,000 00
5,800 00
1,300 00
1,000 00
Subtract: Unapplied LPP losses from other years
Net gain only 159

Capital gains deferral from qualifying dispositions of eligible small business corporation shares
161
(included in 3 above)
Farming and fishing income eligible for the capital gains deduction from the disposition of eligible capital property
173
(for details, see Form T657)
T5, T5013, T5013A, and T4PS Information slips - Capital gains (or losses)
174
T3 information slips - Capital gains (or losses)
176
Capital loss from a reduction in your business investment loss
178
Total of all gains (or losses) before reserves 191
Reserves from line 6706 of Form T2017 (if negative, show it in brackets and subtract it)
192
Total capital gains (or losses) 197

158

500 00
500 00
(1,800 00)
300 00

7,617 31
7,617 31
Page 1 of 2

Tax Software Assignment Problem - Chapter 8
Walford, Mary-Chap 8P SIN: 527 000 129

Capital Gains (or Losses)
Multiply the amount on line 197 by 50%.
Enter the taxable capital gains on line 127 of your return.
If it is a net capital loss, see line 127 in the guide.

Taxable capital gains
(or net capital loss) in 2010 199

3,808 66

Privacy Act, Personal Information Bank number CRA PPU 005

d

zle hz 159

Page 2 of 2

d

zle hz 160

Canadian Tax Principles 2011/2012 - Solutions Manual

Solution To AP Nine - 1

CHAPTER NINE SOLUTIONS
Solution to Assignment Problem Nine - 1
ITA 56(1)(a)(iii) requires the inclusion of death benefits in income in the year in which they are received. However, ITA 248 defines these benefits in a manner that allows the exclusion of the first $10,000 of a death benefit paid to a surviving spouse.
As a consequence, none of the $6,000 payment that was received during 2011 will be included in Mr. Long’s 2011 Net Income For Tax Purposes, and only $2,000 ($6,000 + $6,000
- $10,000) will be taxable in 2012.
After the first $10,000 in death benefits is received tax free, any subsequent death benefits received will be fully taxable to Mr. Long .

d

zle hz Canadian Tax Principles 2011/2012 - Solutions Manual

161

Solution To AP Nine - 2

Solution to Assignment Problem Nine - 2
Part A - Net Income For Tax Purposes
The minimum Net Income For Tax Purposes that can be reported by Ms. Watts is calculated as follows: Wages From Cold Lake Employment
Moving Costs To Cold Lake (Note 1)
Scholarship Received
Exempt Portion Of Scholarship (100%)
Child Care Costs (Note 2)
Employment Income In Calgary
Moving Costs To Calgary (Note 1)
Eligible Dividends Received
Gross Up Of Dividends [(41%)($3,500)]
Child Support Received (Note 3)
Inheritance (Not Taxable)
TFSA Contributions (Note 4)
TFSA Withdrawal (Note 4)
RESP Contributions (Note 5)

$ 9,600
(
685)
$4,000
( 4,000)

Net Income For Tax Purposes

Nil
( 1,500)
600
(
600)
3,500
1,435
Nil
Nil
Nil
Nil
Nil
$12,350

zle hz Note 1 The cost of the move to Cold Lake is deductible against the income that was earned there as it is more than 40 km from Calgary. The moving costs related to the move back to Calgary can be deducted to the extent of her employment income at that location. The remaining $226 ($826 - $600) can be carried forward to apply against any eligible income that is earned in Calgary during 2012.
Note 2 As she is the lower income spouse, Ms. Watts will deduct the child care payments. The deduction is the least of the following amounts:
·
·
·

The amount paid = $1,500 [(12)($125)].
The annual child care expense amount = $8,000 [(2)($4,000)].
Two-thirds of Earned Income = $6,800 [(2/3)($9,600 + $600)].

Note 3 Since 1997, child support payments are not deductible to the payor and are not taxed in the hands of the recipient.

d

Note 4 TFSA contributions and withdrawals have no tax consequences. There is also no income attribution as a result of the TFSA contribution by Ms. Watts’ husband.
Note 5

Contributions to RESPs are not deductible.

Part B - Registered Education Savings Plan
While contributions to RESPs are not deductible, earnings within the plan accumulate on a tax free basis. Further, when the earnings are withdrawn, they are likely to be taxed in the hands of the plan beneficiaries. As they will be full or part time students at this time, they will either be in a low tax bracket or, in many cases, have income that is below the basic personal tax credit. This arrangement can involve a considerable savings in taxes.
In addition, for contributions of up to $2,500 per year, the federal government will make additional contributions under the Canada Education Savings Grants (CESG) program. These contributions will add a minimum of $500 to the first $2,500 of annual contributions. Note, however, that given her husband’s level of income, the family will not be eligible for the
Canada Learning Bonds program.
Given the potential tax savings, as well as the federal government contributions under the
CESG program, Ms. Watts and her husband should consider contributing at least $2,500 per year to each of the children’s RESPs.

162

Canadian Tax Principles 2011/2012 - Solutions Manual

Solution To AP Nine - 2
Since her children have not had RESPs before, they have CESG contribution room carried forward. Ms. Watts should determine the contribution schedule required to maximize the
CESGs for both children so that she can plan to take advantage of the CESG contribution room if there are sufficient funds available.

d

zle hz Canadian Tax Principles 2011/2012 - Solutions Manual

163

Solution To AP Nine - 3

Solution to Assignment Problem Nine - 3
The moving related transactions would result in the following addition to Leonard’s Net
Income For Tax Purposes
$12,000
10,000
15,000

Total At New Location (Note 3)
General Moving Allowance

$37,000
15,000

Total Employment Income Inclusions
Moving Expense Deduction
Available Deductions:
Cost Of House Hunting Trip (Note 4)
Real Estate Commission - Regina Home
Legal Fees - Regina Home
Other Regina Home Costs (Not Deductible)
Legal Fees - Kelowna Property
Land Transfer Tax - Kelowna Property
Food And Lodging - 10 Days In Regina (Note 4)
Travel Cost - Regina To Kelowna
Food And Lodging - 5 Days In Kelowna (Note 4)
Storage And Moving Costs

$52,000

zle hz Income Inclusions At New Location
Salary At New Location (One Month)
Compensation For Loss On Regina Residence (Note 1)
Payment For Higher Housing Costs (Note 2)

Addition To Net Income For Tax Purposes

Nil
($14,400)
(
625)
(
Nil)
(
895)
( 4,600)
( 2,500)
(
585)
( 1,125)
( 8,500)

( 33,230)
$18,770

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 $35,000
($395,000 - $360,000), the inclusion would be $10,000 [(1/2)($35,000 - $15,000)].
Note 2 Any amounts paid to compensate an employee for higher housing costs must be included in income in full.

d

Note 3 As noted in the text, moving costs can only be deducted against “income earned at the new work location”. This raises the question as to whether the $25,000 that was provided to cover moving costs would be considered to be “earned at the new location”. It would be our view that, in addition to the $12,000 salary, the amounts paid by the Kelowna office ($10,000 + $15,000) would also be included.
However, the general moving allowance paid by the Regina office would not be included. This means that the overall limit on the moving expense deduction is the
$37,000 figure shown in the preceding table. As the actual costs are below this overall limit, the $33,230 in available moving costs can be deducted.
Note 4 Food and lodging costs, near the old or new residence, are limited to 15 days. His daily costs for food and lodging are highest in Regina ($250). As he had acquired the new residence as of day three, he could have deducted one day ’s food and lodging on his house hunting trip. However, since his daily cost for food and lodging were less on the house hunting trip ($190) than when he and his family are waiting for the house ($225), it is more advantageous to claim the costs related to 10 days in Regina and 5 days in Kelowna with his family.

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Canadian Tax Principles 2011/2012 - Solutions Manual

Solution To AP Nine - 4

Solution to Assignment Problem Nine - 4
The deductible actual costs are as follows:
Actual Costs Excluding Camp Costs (48 weeks At $260)
Periodic Cost Limit For Camp Weeks
[($100)(1)(4 weeks) + ($175)(1)(4 weeks) + ($250)(1)(4 weeks)]

$12,480

Deductible Actual Costs

$14,580

2,100

Generally, the spouse with the lower income must claim the deduction for child care expenses. In this case, that would be Sue Brendal. However, under certain circumstances, the spouse with the higher income can claim a deduction that is subject to a weekly limitation.
One of these circumstances is when the lower income spouse is in attendance on a full time basis at a designated financial institution. This means that for the 5 week period that Sue is attending the accounting course, Maureen can deduct limited child care expenses.
The relevant calculations for determining the deductible costs for each individual are as follows: Maureen

Sue

$14,580

$14,580

$21,000

$21,000

Actual Costs And Limited Camp Costs

zle hz Annual Expense Limit
[($4,000)(1) + ($7,000)(1) + ($10,000)(1)]
2/3 Of Earned Income
[(2/3)($216,000)]
[(2/3)($24,000)]

Periodic Expense Limit [($100)(1)(5 weeks)
+ ($175)(1)(5 weeks) + ($250)(1)(5 weeks)]

$144,000
$16,000
$

2,625

N/A

The least of these amounts for Maureen is $2,625. You should note that there is no requirement that actual payments be allocated on the basis of the time that Sue was attending the accounting course.
The lowest figure for Sue is $14,580, the actual child care costs. Sue’ deduction for the current year of $11,955 ($14,580 - $2,625) has been reduced by the amount claimed by
Maureen.

d

Since Lori is 4 years old, it can be assumed that the support agreement was made after 1997 and the child support received is not taxable.
As Maureen is the higher income spouse, her 3 week stay in the hospital has no effect on the child care expense calculations.

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165

Solution To AP Nine - 5

Solution to Assignment Problem Nine - 5
Amount Owing With No Pension Income Splitting
Jean’s Net Income For Tax Purposes, prior to any OAS clawback would be $174,300
($168,000 + $6,300). Because of his income level, all of the $6,300 in OAS payments would be clawed back [(15%)($174,300 - $67,668) = $15,995]. This would leave Jean with a Net and Taxable Income of $168,000 ($174,300 - $6,300).
Carole’s Net Income For Tax Purposes, prior to any OAS clawback would be $48,300
[(12)($3,500) + $6,300]. As this amount is below the OAS threshold of $67,668, there would be no OAS clawback. This would leave Carole with a Net and Taxable Income of $48,300.
Based on these figures, Jean and Carole’s 2011 Amounts Owing would be calculated as follows: $27,256
11,368

Total Before Credits
Credits:
Basic Personal
Spousal ($10,527 - $48,300)
Age [$6,537 - (15%)($168,000 - $32,961)
Pension

$38,624
($10,527)
Nil
Nil
( 2,000)

Total
Rate

($12,527)
15%

zle hz Tax Of First $128,800
Tax On Next $39,200 ($168,000 - $128,800) At 29%

(

1,879)

Federal Tax Payable
OAS Clawback

$36,745
6,300

Total Amount Owing - Jean

$43,045
$6,232
1,486

Total Before Credits
Credits:
Basic Personal
($10,527)
Age [$6,537 - (15%)($48,300 - $32,961)( 4,236)
Disability
( 7,341)

$7,718

Total
Rate

d

Tax On First $41,544
Tax On Next $6,756 ($48,300 - $41,544 At 22 Percent

($22,104)
15%

Total Amount Owing (No Clawback) - Carole

( 3,316)
$4,402

In the absence of pension income splitting , the total amount owing for Jean and Carole would be calculated as follows:
Jean
Carole

$43,045
4,402

Total Amount Owing

$47,447

Amount Owing With Pension Income Splitting
If Jean’s pension is evenly split, he will have a Net Income For Tax Purposes, prior to any OAS clawback, of $90,300 [(1/2)($168,000) + $6,300]. The OAS clawback would be $3,395
[(15%)($90,300 - $67,668)]. This would leave Jean with a Net and Taxable Income of $86,905
($90,300 - $3,395).

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Canadian Tax Principles 2011/2012 - Solutions Manual

Solution To AP Nine - 5
Also reflecting pension income splitting , Carole’s Net Income For Tax Purposes, prior to any
OAS clawback, would be $132,300 [(1/2)($168,000) + (12)($3,500) + $6,300]. Given this new income figure, all of the OAS payments received by Carole would be clawed back
{[(15%)($132,300 - $67,688)] = $9,692}. This would leave Carole with a Net and Taxable
Income of $126,000 ($132,300 - $6,300)
Based on these figures, Jean and Carole’s 2011 Amounts Owing would be calculated as follows: Tax On First $83,088
Tax On Next $3,817 ($86,905 - $83,088) At 26%

$15,371
992

Tax Before Credits
Credits:
Basic Personal
($10,527)
Spousal ($10,527 - $126,000)
Nil
Age [$6,537 - (15%)($86,905 - $32,961)
Nil
Pension
( 2,000)

$16,363

Total
Rate

($12,527)
15%

(

1,879)
$14,484
3,395

Total Amount Owing - Jean

$17,879

Tax On First $83,088
Tax On Next $42,912 ($126,000 - $83,088) At 26%

$15,371
11,157

Tax Before Credits
Credits:
Basic Personal
Pension
Disability

$26,528

($10,527)
( 2,000)
( 7,341)

Total
Rate

($19,868)
15%

zle hz Federal Tax Payable
OAS Clawback

Federal Tax Payable
OAS Clawback

d

Total Amount Owing - Carole

(

2,980)
$23,548
6,300
$29,848

The amount owing with maximum pension income splitting would be calculated as follows:
Jean
Carole

$17,879
29,848

Total Amount Owing

$47,727

In this case, maximum pension income splitting results in an amount owing that is $280
($47,727 - $47,447) higher. While the splitting removed all of Jean’s income from the 29 percent bracket, the 50:50 split resulted in Carole losing all of her OAS payment.
It is likely that, if pension income splitting was limited to an amount that would leave Carole’s
OAS payments clawback free, an improved result could be achieved with this planning technique.

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167

Solution To AP Nine - 6

Solution to Assignment Problem Nine - 6
Part A
In the absence of an election by Mr. Hadley not to have ITA 73(1) apply, the disposition will be deemed to have taken place at Mr. Hadley ’s tax cost. This would be the $26,000 adjusted cost base of the land and the $48,500 UCC for the building . As a result, the transfer would not result in any tax effects for either Mr. or Mrs. Hadley. However, when the sale of the rental property occurs, the couple is still married and the attribution rules of ITA 74.1 would apply.
This means that the capital gains and recaptured CCA resulting from the sale would be taxed in the hands of Mr. Hadley. The increase in his Net Income For Tax Purposes of $63,500
($14,500 + $12,500 + $36,500) would be calculated as follows:
Land
Proceeds Of Disposition
Adjusted Cost Base

$55,000
( 26,000)

Building
(

$110,000
85,000)

Capital Gain
Inclusion Rate

$29,000
1/2

$ 25,000
1/2

Taxable Capital Gain

$14,500

$ 12,500

zle hz Capital Cost
UCC

(

Recapture Of CCA

$ 85,000
48,500)
$ 36,500

Part B
The preceding result would be changed if Mrs. Hadley agrees to purchase the property at its fair market value. Provided Mr. Hadley elects out of ITA 73(1), the transfer will be at fair market value, resulting in the same $36,500 of recaptured CCA, as calculated above, and capital gains on the land and building calculated as follows:
Land

Deemed Proceeds Of Disposition
Adjusted Cost Base

$51,000
( 26,000)

Capital Gain
Inclusion Rate

$25,000
1/2

d

Taxable Capital Gain

$12,500

Building
(

$107,000
85,000)
$ 22,000
1/2
$ 11,000

This would produce a total income inclusion at the time of transfer of $60,000 ($36,500 +
$12,500 + $11,000). As the income attribution rules do not apply to sales for proceeds equal to fair market value, subsequent capital gains would not be attributed to Mr. Hadley.
However, when Mrs. Hadley sells the property, she would incur total taxable capital gains of
$3,500 calculated as follows:
Land
Proceeds Of Disposition
Adjusted Cost Base

168

$55,000
( 51,000)

Building
$110,000
( 107,000)

Capital Gain
Inclusion Rate

$ 4,000
1/2

$

3,000
1/2

Taxable Capital Gain

$ 2,000

$

1,500

Canadian Tax Principles 2011/2012 - Solutions Manual

Solution To AP Nine - 7

Solution to Assignment Problem Nine - 7
Alonso
At Transfer
As Alonso did not elect out of the ITA 73(1) spousal rollover, no income will result from the transfer to his spouse Alice. However, there is no rollover for the transfer of public company shares to a related minor. This means there will be a taxable capital gain on the transfer of
10,000 shares to his son as follows:
Deemed Proceeds Of Disposition [($17.00)(10,000)]
Adjusted Cost Base [($12.50)(10,000)]

$170,000
( 125,000)

Capital Gain
Inclusion Rate

$ 45,000
1/2

Taxable Capital Gain

$ 22,500

Dividends
As all of the shares were given to a spouse and a related minor, 100 percent of the dividends would be attributed back to Alonso. His increase in Net Income For Tax Purposes due to the dividends would be $16,920 [(15,000)(141%)($0.80)].

zle hz Sale Of Shares
As there is no attribution of capital gains when shares are transferred to a related minor, the sale of shares by Alonso’s son would have no effect on Alonso’s 2011 Net Income For Tax
Purposes. However, the gain on the sale of shares by his spouse would be attributed back to
Alonso. The amount is calculated as follows:
Proceeds Of Disposition [($16.00)(5,000)]
Adjusted Cost Base [($12.50)(5,000)]

$80,000
( 62,500)

Capital Gain
Inclusion Rate

$17,500
1/2

Taxable Capital Gain

Alice

$8,750

d

None of these transactions would have any effect on Alice’s 2011 Income For Tax Purposes.

Alonso Jr.

When Alonso Jr. sells his Lisgar Inc. shares, he will have an allowable capital loss calculated as follows: Proceeds Of Disposition [($16.00)(10,000)]
Adjusted Cost Base [($17.00)(10,000)]

$160,000
( 170,000)

Capital Loss
Inclusion Rate

($ 10,000)
1/2

Allowable Capital Loss

($

5,000)

This loss can only be deducted in 2011 to the extent that Alonso Jr. has taxable capital gains during 2011.

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169

Solution To AP Nine - 8

Solution to Assignment Problem Nine - 8
TD Bank Shares - Gift To Spouse
These shares could be given to Jonathan with no immediate tax consequences [ITA 73(1)].
The tax cost to Jonathan will be unchanged from her tax cost of $550,000.
Any dividends on the shares will be attributed back to Ms. Vaughn.
If Mr. Flex sells the shares for $800,000 ($100,000 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 allocated to the income of Ms. Vaughn:
Proceeds Of Disposition
Adjusted Cost Base

$800,000
( 550,000)

Capital Gain
Inclusion Rate

$250,000
1/2

Taxable Capital Gain

$125,000

zle hz TD Bank Shares - Gift To Children
In the case of a transfer to either of her children, ITA 69 would require that the gift be treated as a deemed disposition with the proceeds at the fair market value of $700,000. This would result in an immediate taxable capital gain of $75,000 [(1/2)($700,000 - $550,000)].
The tax base to either of the children would be the fair market value of $700,000.
If the shares were gifted to Vicky ’s 15 year old son Biff, any dividends on the shares would be attributed back to her. This would not be the case with a gift to her 27 year old daughter
Sheila.
If the shares were sold by either child for $800,000, there would be no tax consequences for
Ms. Vaughn. However, the selling child would have a taxable capital gain of $50,000
[(1/2)($800,000 - $700,000)].

Vaughn Enterprises Ltd. - Gift To Spouse
The shares in Vaughn Enterprises Ltd. could be gifted to Jonathan Flex with no immediate tax consequences [ITA 73(1)].

d

The tax basis for these shares would remain at Ms. Vaughn’s cost of $475,000.
Any dividends on the shares will be attributed back to Ms. Vaughn.
Should Jonathan Flex subsequently sell these shares for $1,300,000 ($100,000 more than their fair market value at the time of the gift), the following taxable capital gain would be attributed back to Ms. Vaughn under the general rules of ITA 74.1(1):
Proceeds (Fair Market Value)
Adjusted Cost Base

170

(

$1,300,000
475,000)

Capital Gain
Inclusion Rate

$ 825,000
1/2

Taxable Capital Gain

$ 412,500

Canadian Tax Principles 2011/2012 - Solutions Manual

Solution To AP Nine - 8
Vaughn Enterprises Ltd. - 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, Ms. Vaughn would have a taxable capital gain on the transfer to either child of $362,500 [(1/2)($1,200,000 $475,000)].
The adjusted cost base to the children would be the fair market value of $1,200,000.
Note To Instructor On Gift To Biff Because dividends paid by private companies to individuals who are under 18 is subject to the tax on split income, such dividends would not attributed back to Ms. Vaughan. However, the tax on split income is not covered until Chapter 11 of the text. If your examination includes coverage of the material up through Chapter 11, this is the only acceptable answer. However, if you have not covered this material, indicating the dividends would be attributed back to
Ms. Vaughan would be an acceptable alternative answer.
There would be no income attribution if the shares were gifted to her 27 year old daughter.
If the shares were subsequently sold for $1,300,000 by the child receiving the gift, that child would have a taxable capital gain of $50,000 [(1/2)($1,300,000 - $1,200,000)] that would be taxed in their hands.

zle hz Rental Property - Gift To Spouse
The rental property could be transferred to Jonathan Flex with no immediate tax consequences [ITA 73(1)].
The tax cost of the property would not be changed in the hands of Jonathan Flex. The capital cost of the building would remain at $1,200,000 ($1,500,000 - $300,000), the adjusted cost base of the land would remain at $300,000, and the UCC of the building would be unchanged at $960,000.
Any income on the property while it is held by her spouse would be attributed back to Ms.
Vaughn.
At the time of a subsequent sale of the property by Jonathan Flex for $2,500,000 ($100,000 more than its fair market value at the time of the gift), the income attribution rules of ITA
74.1(1) would apply. This would result in the following amounts being attributed to
Ms.Vaughn at that time:
Land

Capital Gain
Inclusion Rate
Taxable Capital Gain

d

Proceeds Of Disposition
Adjusted Cost Base/Capital Cost

Building

$400,000
( 300,000)

$2,100,000
( 1,200,000)

$100,000
1/2

$ 900,000
1/2

$ 50,000

$ 450,000

Capital Cost Of Building
UCC
Recapture Of CCA

(

$1,200,000
960,000)
$ 240,000

Rental Property - Gift To Children
There is no exemption from the general rules of ITA 69 for transfers of property to children. As a consequence, Ms. Vaughn would be subject to taxation based on a disposition of the property at its fair market value of $2,000,000 for the building and $400,000 for the land. This would result in following amounts of income for Ms. Vaughn at the time of transfer.

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171

Solution To AP Nine - 8
Land
Proceeds Of Disposition
Adjusted Cost Base/Capital Cost

Building

$400,000
( 300,000)

$2,000,000
( 1,200,000)

Capital Gain
Inclusion Rate

$100,000
1/2

$ 800,000
1/2

Taxable Capital Gain

$ 50,000

$ 400,000

Capital Cost Of Building
UCC

(

Recapture Of CCA

$1,200,000
960,000)
$ 240,000

The cost to either of the children for capital gains purposes would be $2,000,000 for the building and $400,000 for the land. For CCA and recapture purposes, the building’s value would be limited to $1,600,000 [$1,200,000 + (1/2)($2,000,000 - $1,200,000)].
Any rental income on the property while it is held by her 15 year old son Biff would be attributed back to Ms. Vaughn until the son reaches 18 years of age. This would not be the case if the gift were to her 27 year old daughter.

zle hz There would be no attribution of capital gains on a gift to either child. If the children subsequently sold the building for $2,100,000, there would be a taxable capital gain on the building of $50,000 [(1/2)($$2,100,000 - $2,000,000)] that would be taxed in their hands.
There would not be a taxable capital gain on the sale of the land.

Farm Land - Gift To Spouse
In the case of the farm land, if Ms Vaughn does not elect out of ITA 73(1) there will be no tax consequences at the time of the transfer. The tax cost to Jonathan Flex will be unchanged from her tax cost of $800,000.
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 Jonathan.
In the event of a subsequent sale for $1,300,000 ($100,000 more than its fair market value at the time of the gift), the following taxable capital gain would be attributed to Ms. Vaughn under ITA 74.1(1):

Capital Gain
Inclusion Rate
Taxable Capital Gain

d

Proceeds Of Disposition
Adjusted Cost Base

(

$1,300,000
800,000)
$500,000
1/2
$250,000

Farm Land - Gift To Children
ITA 73(3) permits the transfer of farm property used by the taxpayer or her family to a child on a tax free basis. This means that Ms. Vaughn 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 $800,000.
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 Ms. Vaughan’s children.
If the property were later sold by Sheila for $1,300,000, the resulting capital gain would not be attributed back to Ms. Vaughan. However, if the property is transferred to Biff and he sells the property for $1,300,000 ($100,000 more than its fair market value at the time of the gift) prior to reaching age 18, a taxable capital gain of $250,000 [(1/2)($1,300,000 - $800,000)] would be attributed back to Ms. Vaughn. 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.

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Canadian Tax Principles 2011/2012 - Solutions Manual

Solution To AP Nine - 9

Solution to Assignment Problem Nine - 9
Employment Income
While he is no longer an employee, the exercise of his former employer’s stock option created employment income of $60,000 [(8,000)($22.50 - $15.00)]. As his former employer is a public company, the employment income benefit will be assessed in 2011 when the options are exercised.
Net Business Income
As Carlos is an accountant, he qualifies for the use of the billed basis of revenue recognition.
This means that he does not have to accrue unbilled work in progress. Given this, the required calculations are as follows:
Income On Cash Flow Basis
December 31 Billed Receivables
January 1 Billed Receivables
December 31 Accounts Payable
January 1 Accounts Payable

$59,300
15,000
( 37,000)
( 32,000)
14,000
(
(
(

Net Business Income (Loss)

($ 1,680)

zle hz Accrual Based Income
CCA On Building (Note 1)
CCA On Furniture And Fixtures (Note 1)
CCA On Automobile (Note 1)

$19,300
8,200)
8,280)
4,500)

Note 1 Mr. Santini’s relocation of his business involves a voluntary disposition for a former business property. As the replacement occurred in the same year as the disposition, recapture is not an issue. However, in the absence of the ITA 44 election, there would be a capital gain on the sale of the building and land of $125,000, calculated as follows: Land

Proceeds Of Disposition
Adjusted Cost Base

Building

$125,000
( 100,000)

$300,000
( 200,000)

$ 25,000

$100,000

Capital Gain

d

As the problem requires determining minimum Net Income For Tax Purposes, we will assume that the ITA 44 election is made. This means that he will not have to recognize the $125,000 capital gain in 2011. However, the capital cost of the new building will be $280,000 and the adjusted cost base of the new land will be $115,000, calculated as follows:
Land
Actual Capital Cost
Capital Gain Deferred By Election
Adjusted Capital Cost

(

Building

$140,000
25,000)

$380,000
( 100,000)

$115,000

$280,000

The January 1, 2012 adjusted cost base of the land is $115,000. The maximum 2011
CCA and January 1, 2012 UCC of Mr. Santini’s business assets are as follows:

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173

Solution To AP Nine - 9

January 1, 2011 UCC
Additions (Notes 2 and 3)
Disposals - Lesser Of:
Cost
Proceeds Of Disposition
One-Half Net Additions

Class 1

Class 8

Class 10.1

$165,000
280,000

$28,600
58,000

Nil
$30,000

( 32,400)
( 12,800)

( 15,000)

$41,400
8,280)
12,800

$15,000
( 4,500)
15,000

$45,920

$25,500

( 200,000)

Base For CCA
CCA At 4%, 20% and 30%
One-Half Net Additions
January 1, 2012 UCC

(

40,000)

(

$205,000
8,200)
40,000
$236,800

(

Note 2 When a voluntary disposition is involved, the ITA 44 election only applies to real property and would not be applicable to the furniture and fixtures. However, this is not an issue in this problem as there is no capital gain on the disposition of the old furniture and fixtures. In addition, the assets are replaced in the year of disposition so there is no recapture of CCA.
Note 3 Although the capital cost of the automobile is $52,000, it is a Class 10.1 asset and eligible for CCA on only $30,000.

zle hz As Carlos has a net business loss and his former employer withheld the maximum CPP contributions, he does not have any CPP payable on his self-employed income.

Property Income
Mr. Santini’s property income for 2011 can be calculated as follows:
Interest Income
Eligible Dividends
Gross Up On Dividends [(41%)($3,820)]

$2,500
3,820
1,566

Total Property Income

$7,886

Taxable Capital Gains
Mr. Santini’s taxable capital gains for 2011 would be calculated as follows:
$ 9,000
58,792
Nil

Total Taxable Capital Gains

$67,792

d

Former Employer’s Shares
{[1/2][(8,000)($25.00 - $22.50) - $2,000]}
Sale Of Toronto House (Note 4)
Sale Of Cottage (Note 4)

Note 4 For the 12 years 2000 through 2011, either the Toronto house or the Huntsville cottage could be designated as Mr. Santini’s principal residence. The gain on the house is
$141,100 ($420,000 - $273,900 - $5,000), while the gain on the cottage is $194,000
($350,000 - $156,000). This would suggest that he should designate the cottage for 11 of the 12 years, with the remaining year going to the Toronto house. Using this allocation, the results are as follows:

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Canadian Tax Principles 2011/2012 - Solutions Manual

Solution To AP Nine - 9
House

Cottage

Proceeds Of Disposition
$420,000
Adjusted Cost Base ($273,900 + $5,000) ( 278,900)
Commissions At 4.5% (Note 5)
N/A
Legal Fees
N/A
Capital Gain Before Exemptions
Exemptions:
[$141,100][(1 + 1) ÷ 12]
[$177,575][(11 + 1) ÷ 12]

$350,000
( 156,000)
( 15,750)
(
675)

$141,100
(

$177,575

23,517)
( 177,575)

Capital Gain
Inclusion Rate

$117,583
1/2

Nil
N/A

Taxable Capital Gain

$ 58,792

Nil

Note 5 The costs of selling a previously occupied residence that was ordinarily inhabited can be deducted as part of moving expenses. However, it cannot also be used to reduce the capital gain. As stated in the problem, Mr. Santini deducts the sales commission and legal fees on the house as a moving cost.

zle hz Other Income And Deductions
Mr. Santini’s other income and deductions can be calculated as follows:
Spousal Support (Note 6)
Moving Expenses (Note 7)
Universal Child Care Benefit (Note 8)
Child Care Costs (Note 9)

$42,000
Nil
Nil
( 21,000)

Total Other Income And Deductions

$21,000

Note 6 Of the $10,000 per month that Mr. Santini receives from his former spouse,
$3,500 has been designated as spousal support. This $42,000 amount [(12)($3,500)] will be included in his 2011 Net Income For Tax Purposes. Neither the $6,500 per month in child support nor the $15,000 lump-sum payment will be included in Mr. Santini’s Net
Income For Tax Purposes.

d

Note 7 As Mr. Santini has no income at the new work location and, as a consequence, he cannot deduct any moving expenses during 2011. However, he will have a significant carry forward, calculated as follows:
Real Estate Commissions On Toronto House [(4.5%)($420,000)]
Legal Fees On Sale Of Toronto House
Legal Fees On Acquisition Of Kamloops House
Payments For Moving And Storage
Hotel, Food, And Gasoline On Drive To Kamloops (5 Days)
Costs Of Hotel And Food In Kamloops While Waiting For
Availability Of New Residence (12 Days)

$18,900
850
940
9,800
1,860

Total Moving Expenses Carried Forward

$37,025

4,675

Mr. Santini cannot deduct the costs of the Kamloops trip that was required to find a new residence. Note 8 In a single parent family, the parent has the option of including the total amount of the benefits received in the income of a dependant who qualifies for the eligible dependant tax credit. As a result, Carlos will not include the UCCB in his net income. The benefits will be considered income in the calculation of the eligible dependant credit.

Canadian Tax Principles 2011/2012 - Solutions Manual

175

Solution To AP Nine - 9
Note 9
·

The deductible amount of child care cost is based on the least of three figures:

Actual Child Care Costs Plus Deductible Camp Costs During the 4 week period when they are at camp, their costs are limited to $250 per week for Lolita and $100 per week for Estelle. The total is as follows:
Actual Child Care Costs Other Than Camp ($22,500 + $1,000)
Deductible Camp Costs - 4 Weeks At $350 ($250 + $100)

$23,500
1,400

Total Actual Child Care Costs Allowed

$24,900

·

Annual Limit The annual limit is $21,000 ($7,000 for Andrew, $10,000 for
Lolita, and $4,000 for Estelle).

·

Income Limit For this purpose, Mr. Santini’s “earned income” is his gross employment income of $60,000. Two-thirds of this would be $40,000. His business loss of $1,680 does not affect this limit as it was a loss.

The least of these figures is the annual limit of $21,000.

zle hz Net Income For Tax Purposes
Mr. Santini’s Net Income For Tax Purposes would be determined as follows:
Employment Income
Net Business Income (Loss)
Property Income
Taxable Capital Gains
Other Income And Deductions

(

Net Income For Tax Purposes

$ 60,000
1,680)
7,886
67,792
21,000
$154,998

The contributions made by Carlos to the TFSAs, RESP and RDSP are not deductible in determining his Net Income For Tax Purposes. In addition, the withdrawal from his TFSA is not taxable.

Taxable Income
Mr. Santini’s Taxable Income would be determined as follows:

d

Net Income For Tax Purposes
Stock Option Deduction [(1/2)($60,000)]
Taxable Income

176

(

$154,998
30,000)
$124,998

Canadian Tax Principles 2011/2012 - Solutions Manual

Solution To AP Nine - 9
Tax Payable
Mr. Santini’s Tax Payable would be determined as follows:
Tax On First $83,088
Tax On Next $41,910 ($124,998 - $83,088) At 26 Percent

$15,371
10,897

Tax Before Credits
Tax Credits:
Basic Personal
Eligible Dependant - Estelle
($10,527 - $1,200) (Note 8 and 10)
Child [(2)($2,131)]
Caregiver (Note 10)
Transfer Of Lolita’s Disability (Note 11)
CPP (maximum)
Canada Employment
Medical Expenses (Note 12)

$26,268

( 9,327)
( 4,262)
(
Nil)
( 7,341)
( 2,218)
( 1,065)
( 18,868)

Total Credit Base
Rate

($53,608)
15%

($10,527)

zle hz Charitable Contributions [(15%)($200)
+ (29%)($2,400 - $200)]
Dividend Tax Credit [(13/23)($1,566)]
Federal Tax Payable

(

8,041)

(
(

668)
885)
$16,674

Note 10 As Estelle qualifies for the eligible dependant credit, IT 118(4)(c) prevents her father from claiming either the caregiver credit or the infirm dependant over 17 credit for her. Note that it does not make any difference whether the eligible dependant credit is claimed for Estelle, Lolita or Andrew. The result would be identical as the requirement is that Estelle qualifies for the eligible dependant credit, it does not necessarily have to be claimed for her.
Note 11 The disability supplement of $4,282 is not available as it has to be reduced for child care costs in excess of $2,508. As it would be reasonable to allocate $7,500
[(1/3)($22,500)] of the care costs to Lolita, this would be in excess of $6,790 [($4,282
+ $2,508)].
Note 12

The medical expenses eligible for the credit are as follows:

d

Medical Expenses Of Carlos, Andrew, And Lolita
($850 + $1,250 + $8,560)
Lesser Of:
• [(3%)($154,998)] = $4,650
• 2011 Threshold Amount = $2,052

( 2,052)

Balance Before Dependants 18 And Over
Estelle’s Medical Expenses
Reduced By The Lesser Of:
• $2,052
• [(3%)(Nil)] = Nil
Medical Expense Tax Credit Base

$10,660

$ 8,608
$10,260
Nil

10,260
$18,868

Prior to 2011, medical expenses claimed for an adult dependant were limited to an absolute amount of $10,000. The March 22, 2011 budget proposes the elimination of this constraint.

Canadian Tax Principles 2011/2012 - Solutions Manual

177

Solution To AP Nine - 10

Solution to Assignment Problem Nine - 10
Net Employment Income
Carolyn’s employment income would be calculated as follows:
Salary [(10 Months)($5,000)]
RPP Contributions (Note 1)
Automobile (Note 2)
Travel Allowance (Note 3)
Moving Cost Allowance
Housing Loss Reimbursement (Note 4)
Housing Cost Allowance (Note 5)
Net Employment Income

(

$50,000
2,600)
5,951
Nil
10,000
Nil
7,500
$70,851

Note 1 While Carolyn’s RPP contributions can be deducted, the matching contribution by her employer does not create a taxable benefit.
Note 2

The automobile benefit would be calculated as follows:
$4,031

Total Benefit

$5,951

zle hz Standby Charge [(2%)($42,000)(9)(8,000 ÷ 15,003)]
Operating Cost Benefit - Lesser Of:
• [(1/2)($4,031)] = $2,016
• [(8,000)($0.24)] = $1,920

1,920

Note 3 As the allowance appears to be reasonable, it does not have to be included in income. Given this, Carolyn cannot deduct her actual costs.
Note 4 As the housing loss reimbursement is less than $15,000, it does not have to be included in income.
Note 5 Assistance with higher housing costs related to a required move must be included in an employee’s income.

Property Income
Carolyn’s only property income is the eligible dividends received of $5,800. This will result in an income inclusion calculated as follows:

Taxable Dividends

d

Dividends Received
Gross Up At 41 Percent

$5,800
2,378
$8,178

Taxable Capital Gains
Carolyn’s only capital gains will arise on the sale of the shares that were gifted to her by her parents. Note that her adjusted cost base for these shares will be their fair market value at the time of the gift.
Proceeds Of Disposition
Adjusted Cost Base

178

$74,000
( 62,000)

Capital Gain
Inclusion Rate

$12,000
1/2

Taxable Capital Gain

$ 6,000

Canadian Tax Principles 2011/2012 - Solutions Manual

Solution To AP Nine - 10
Other Income And Deductions
Carolyn’s other income and other deductions amount is calculated as follows:
Spousal Support (Note 6)
Moving Cost (Note 7)
Child Care Cost (Note 8)
Universal Child Care Benefit (Note 9)

$
500
( 26,517)
( 7,200)
Nil

Total Other Income And Deductions

($33,217)

Note 6 When the full amount of support is not paid, the first payments are deemed to be for child support. Given the total payments of $12,500 and the required child support of $12,000 [(12)($1,000)], Carolyn will include only $500 in her Net Income
For Tax Purposes.
Note 7

Carolyn’s deductible moving costs can be calculated as follows:
$12,500
600
450
1,400
7,250

Total

$26,517

zle hz Selling Cost Of Lethbridge Property
Legal Fees - Sale Of Lethbridge Property
Legal Fees - Purchase Of Edmonton Property
Storage Costs - February 15th Through March 10th
Cost Of Moving Belongings
Food And Lodging In Lethbridge And Edmonton
(Limited To 15 Days At $250)]
Simplified Meal Cost [(2)(3)($51)]
Simplified Milage [($.515)(506)]

3,750
306
261

As this amount is less than her income at her new job, she will be able to deduct the full amount of these expenses.
Note 8

Carolyn’s deductible care costs would be the least of three amounts:

Actual Costs
Edmonton Cost [(38)(($175)]
Camp [(2)($175 + $100)]

$6,650
550

Annual Limit ($7,000 + $4,000)

d

Two-Thirds Earned Income
[(2/3)($70,851 + $2,600 RPP)]

$7,200
$11,000
$48,967

The least of these three amounts is the actual cost of $7,200.

Note 9 In a single parent family, the parent has the option of including the total amount of the benefits received in the income of a dependant who qualifies for the eligible dependant tax credit. As a result, Carolyn will not include the UCCB in her net income. The benefits will be considered income in the calculation of the eligible dependant credit.

Net Income For Tax Purposes
Carolyn’s Net Income For Tax Purposes would be determined as follows:
Net Employment Income
Property Income
Taxable Capital Gains
Other Income And Deductions
Net Income For Tax Purposes

Canadian Tax Principles 2011/2012 - Solutions Manual

$70,851
8,178
6,000
( 33,217)
$51,812

179

Solution To AP Nine - 10
Taxable Income
As Carolyn has no Division C deductions, her Taxable Income would be equal to her Net
Income For Tax Purposes.
Tax Payable
Carolyn’s Tax Payable would be determined as follows:
Tax On First $41,544
Tax On Next $10,268 ($51,812 - $41,544) At 22 Percent

$ 6,232
2,259

Tax Before Credits
Tax Credits:
Basic Personal
($10,527)
Eligible Dependant ($10,527 - $1,200) ( 9,327)
Child [(2)($2,131)]
( 4,262)
Fitness Credit (Maximum)
(
500)
EI Premiums
(
787)
CPP Contributions
( 2,218)
Canada Employment
( 1,065)
Medical Expenses (Note 10)
( 6,046)

$8,491

zle hz Total Credit Base
($34,732)
Rate
15%
Dividend Tax Credit [(13/23)($2,378)]
Charitable Donations [(15%)($200) + (29%)($600 - $200)]

( 5,210)
( 1,344)
(
146)

Federal Tax Payable
Note 10

$1,791

The medical expenses eligible for the credit are as follows:

Total Medical Costs ($1,200 + $4,200 + $2,200)
Lesser Of:
• $1,554 [(3%)($51,812)]
• 2011 Threshold Amount = $2,052
Medical Expense Tax Credit Base

$7,600
(

1,554)
$6,046

d
180

Canadian Tax Principles 2011/2012 - Solutions Manual

Solution To AP Tax Software Chapter 9

Solution to Problem For Tax Software Chapter 9
This solution includes selected schedules and worksheets from the ProFile T1 return.
Note that the program can only be used to calculate 2010 (not 2010) tax returns and the problem and solution reflect this fact.
The tax return is available on the Instructor’s Resource CD-ROM under the heading
“Tax Software Assignment Problems”. The ProFile version contains the complete return. The .PDF version contains only the schedules required in the problem.
·

To view the .PDF file that contains the required schedules, select the file “PDF
Software Problem Chapter 9” from the PDF Format drop-down list.

·

To view the ProFile file of the complete tax return, select the file “Software
Problem Chapter 9” from the ProFile Format drop-down list.

For more information on how to use the ProFile tax program, please refer to the sample tax returns in the Study Guide.

zle hz Part A
With only $300 per year being contributed to William’s RESP, he is not taking full advantage of the Canada Education Savings Grant program. Mary should determine the amount of contributions needed to take full advantage of William’s accumulated CESG contribution room.
Mary can contribute to the same RESP for William as her parents or a different RESP. Since
RESP contributions are not tax deductible, this area should be reviewed after more information on the RRSPs is obtained (Chapter 10).
Notes On Tax Return
The amount paid for spousal support of $2,400 is deductible, while the child support of
$3,000 is not deductible.
The Canada Savings Bond interest of $120 should be attributed back to Seymour’s mother under the income attribution rules. It should not be claimed in William’s name. It should be suggested to Seymour’s mother that she contribute to William’s RESP instead.

d

Since Seymour is the lower income spouse, he would normally deduct child care expenses.
However, since he was a full time student for 12 weeks, Mary will be able to deduct $1,200 (12 weeks @ $100) of the child care expenses. As a result, both Mary and Seymour should file the
T778, Child Care Expenses Deduction form.
The art lessons took place on the weekend and the primary goal of the lessons was to provide an education in art, not provide child care. As a result, the private art lessons are not a child care expense. The fees would not be eligible for the child fitness credit and would not be eligible for a tuition tax credit as they were not for a post-secondary course.

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181

Solution To AP Tax Software Chapter 9
Since Seymour lived in the house from 1997 until 2008, he would designate the house as his principal residence for these 12 years. Assuming the property is transferred to his daughter in
2010 (in reality, given the date of his death, this would be almost impossible), he would have owned the property for an additional two years, for a total of 14 years.
As discussed in the Chapter 7 version (see rental income discussion), since Seymour has been living in Mary ’s house since 2008, and only one taxpayer in a family unit can designate a property as a principal residence for a particular year, it is assumed in this version that he would not designate the Moncton property as a principal residence after 2008.
The total capital gain would be $45,000 ($240,000 - $195,000). The gain reduction formula would calculate his capital gain as $3,214 [$45,000 - ($45,000)(12 + 1) ÷ 14].
Since the disposition of the rental property occurs before the end of 2010, the Statement of
Real Estate Rentals would need to be revised to show the disposition of the building and appliances. The proceeds of disposition of the building , for CCA purposes, would equal its capital cost and UCC of $150,000.
Since the ACB of the land is given in this version, it is input as a Class 90 asset that has been disposed of for its ACB. The capital gain on the building and land is accounted for on the
T2091 (Principal residence designation).

zle hz The disposition of the appliances would create a terminal loss. Note that on the second line of the form T776 CCA, the question “Terminal loss?” must be answered “Yes” to have a terminal loss calculated. The UCC at the beginning of the year was $1,350. The deemed proceeds of disposition is the fair market value at his death of $700. This creates a terminal loss of $650
($1,350 - $700). When combined with the rental income before CCA of $180.04, this leaves a net rental loss of $469.96. Since the loss was created by a terminal loss, it is not limited and is deductible.
Since all of his other assets have been willed to Mary, any other deemed dispositions would take place at his tax values unless Mary, as his executor, elects out of the ITA 70(6) rollover.
Although the software suggests that Mary claim the eligible dependant amount for William, she is not eligible for the credit. Because she was married during the year, she claims her personal credits for 2010 under ITA 118(1)(a) “Married person”. She would have been eligible for the spousal credit had Seymour's income been below the income threshold, but it was not.

d

The eligible dependant credit only applies to taxpayers who are not claim an amount under
ITA 118(1)(a) for the year and Mary does not qualify. She will be able to claim the eligible dependant credit for William in 2010 if she is still single.
Changes to the Summary form from the previous version, excluding calculated amounts other than Balance Owing (Refund).
Summary Line Changed

Mary

Seymour

Chapter 9
Rental income (loss)

(470)

Taxable capital gains

1,607

Child care expenses

1,200

Support payments
Balance Owing (Refund)

182

1,900
2,400

3,557

8,981

Canadian Tax Principles 2011/2012 - Solutions Manual

Tax Software Assignment Problem - Chapter 9
Walford, Mary-Chap 9P SIN: 527 000 129

Summary

2010 Tax Summary (Federal)
Mary-Chap 9P

Total income
Employment *
Old Age Security
CPP/QPP benefits
Other pensions
Split-pension amount
Universal Child Care Benefit
Employment Insurance
Taxable dividends
Interest
Limited partnership
RDSP
Rental
Taxable capital gains
Support payments
RRSP
Other
Self-employment *
Workers' compensation and social assistance

101
113
114
115
116
117
119
120
121
122
125
126
127
128
129
130
135

147
Total income 150
207
208
210
212
213
214
215
217
219
220
221
222
224
229
235
231
Net income 236

1,866
1,671

118

3,809

(470)
1,607

215
45,752
160,427

Total payable
Federal tax
Non-refundable tax credits
Dividend tax credit
Min. tax carry-over/other *

1,200

2011 Estimated
GST/HST credit
Child Tax Benefit
RRSP contribution limit
More than one line is considered

404
350
425
426
Basic federal tax 429

1,900

Non resident surtax
Foreign tax credits / other

405
406
410
414
417
415
418
Net federal tax 420
CPP contributions payable
421
39,244 EI self-employment
430
Social benefits repayment
422
Provincial/territorial tax
428
Total payable 435
Federal tax
2,400 Political/inv. tax credit/other *
1,373 Labour-sponsored tax credit
2,091 Alternative minimum tax
WITB Prepayment (RC210)
Additional tax on RESP

159,227

244
248
249
250
251
254
255
256
Taxable income 260

*

47,008

300
301
303
367
306
308
363
364
365
369
313
314
316
318
319
323
332
Subtotal 335
338
Credit at 15%
Donations and gifts
349
Non-refundable tax credits 350

d

Taxable income
Canadian Forces personnel
Home relocation loan
Security options deductions
Other payments deduction
Losses of other years *
Capital gains deduction
Northern residents
Additional deductions

152,866

Mary-Chap 9P
Non-refundable tax credits
Basic personal amount
Age amount
Spouse / eligible dependant *
Amount for children
Infirm/caregiver *
CPP/QPP/PPIP/EI *
Canada employment amount
Public transit passes amount
Children's fitness amount
Home buyers/Home renovation *
Adoption expenses
Pension income amount
Disability amount
Transfers *
Interest on student loans
Tuition / education
Medical expenses

zle hz Net income
RPP
RRSP *
Split-Pension Deduction
Union and professional dues
UCCB repayment
Child care expenses
Disability supports deduction
Business investment loss
Moving expenses
Support payments
Carrying charges and interest
CPP/QPP/PIPP *
Exploration and development
Employment expenses
Social benefits repayment
Other deductions *

Seymour-Chap 9P

Total credits
Income tax deducted *
QC or YT abatement *
CPP/EI overpayment *
Medical expense supplement
WITB (Schedule 6)
159,227
39,244 Other credits *
GST/HST rebate
Mary-Chap 9P
Seymour-Chap 9P
Instalments
Provincial tax credits
Total credits

22,450 00

7,718

Balance owing (refund)
Combined balance (refund)

437
440
448
452
453
454
457
476
479
482

Seymour-Chap 9P

10,382

10,382

2,101
2,911
1,051

2,091

3,595
14,344
2,152
2,152

18,169
2,725
480
3,205

36,220
2,152
335

5,887
3,205

33,733

2,682

37
33,696

2,682

33,696

2,682
4,183

18,526
52,222

2,116
8,981

48,665

48,665
3,557

8,981

12,538

Complete Return Available On Instructor's CD-ROM
183

Page 1 of 1

Tax Software Assignment Problem - Chapter 9
Gravel, Seymour-Chap 9P (D) SIN: 527 000 079

Support

Support payments
Support payments received
Description

Amount received Taxable amount

Exempt under a tax treaty?
No

Totals (lines 156 and 128 of your return)
Support payments made
First name of recipient
Monica
Monica

Last name

SIN

Gravel
Gravel

527 000 186
527 000 186
___ ___ ___

Totals (lines 230 and 220 of your return)

Amount paid
2,400.00
3,000.00
5,400.00

Allowable deduction 2,400.00

2,400.00

d

zle hz 184

Page 1 of 1

Tax Software Assignment Problem - Chapter 9
Gravel, Seymour-Chap 9P (D) SIN: 527 000 079
Canada Revenue
Agency

Agence du revenu du Canada

Child Care Expenses Deduction for 2010

Read the attached information sheet. On the sheet we define child care expenses, eligible child, net income, earned income, and educational program. For more details, see Interpretation Bulletin IT-495, Child Care Expenses.
Each person claiming the child care expenses deduction must attach a completed Form T778 to his or her return. Do not include receipts, but keep them in case we ask to see them.
If you are the only person claiming child care expenses, complete parts A and B, and, if it applies, Part D.
If there is another person (as described under "Who can claim child care expenses?") and you are the one with the lower net income, complete parts A and B.
If there is another person (as described under "Who can claim child care expenses?") and you are the one with the higher net income, complete parts A, B, C, and, if it applies, Part D.

Child care expense details
Name of child
William

Organization or name and social insurance number
Gaye Normandin SIN 527-000-392
___ ___ ___
___ ___ ___
**Enter the # of weeks spent at boarding school, overnight sports school or overnight camp.

# weeks**

Amount
3,100.00

Claim
3,100.00

Part A - Total child care expenses
•
•

List the first and last names and the dates of birth of all your eligible children, even if you did not pay child care expenses for all of them.
Indicate who received the payments. Provide the name of the child care organization or the name and social insurance number of the individual.
Child's Last and First Name

Gravel, William

Date of Birth

2003-02-24

Name and SIN of individual, or name of organization

Number of weeks

Child care expenses paid

Gaye Normandin SIN 527-000-392

zle hz 3,100 00
3,100 00
Total child care expenses
Note: The maximum you can claim for expenses that relate to a stay in a boarding school (other than education costs) or an overnight camp (including an overnight sports school) is $175 per week for a child included on line 1 in Part B, $250 per week for a child included on line 2, and $100 per week for a child included on line 3.
Enter any child care expenses included above that were incurred in 2010 for a child who was 18 or older.

6795

Part B - Basic limit for child care expenses
Number of eligible children:

Born in 2004 or later, for whom the disability amount cannot be claimed

Born in 2010 and earlier, for whom the disability amount can be claimed

*

Born in 1994 to 2003, (or born in 1993 or earlier, with a mental or physical infirmity, for whom the disability amount cannot be claimed)
Add lines 1 to 3
Enter your total child care expenses from Part A.
Enter your earned income.

X $7,000 =

1

X $10 000 = 6796

2

1 X $4,000 =

45,752 36 X 2/3 =

Enter the amount from line 4, 5, or 6, whichever is least

4,000 00
4,000 00
3,100 00
30,501 57

3
4
5
6

3,100 00 7

d

If you are the person with the higher net income, go to Part C. Leave lines 8 and 9 blank.

Enter any child care expenses that the other person (as described under "Who can claim child care expenses?") with the higher net income deducted on line 214 of his or her 2010 return.
Line 7 minus line 8. If you attended school in 2010 and you are the only person making a claim, also go to Part
D. Otherwise, enter this amount on line 214 of your return.
Your allowable deduction

1,200 00 8
1,900 00 9

* Attach Form T2201, Disability Tax Credit Certificate. If this form has already been filed for the child, attach a note to your return showing the name and social insurance number of the person who filed the form and the tax year for which it was filed.

T778 E (10)

185

Page 1 of 2

Tax Software Assignment Problem - Chapter 9
Part C - Are you the person with the higher net income?
Complete Part C if, in 2010, another person (as described under "Who can claim child care expenses?") with lower net income was in a situation described below. Give the name, social insurance number, and the net income of the other person, and tick the boxes that apply.
Name of person with lower net income

Social insurance number
___ ___ ___

Net income

a) The other person attended school and was enrolled in a part-time educational program (see "Educational program" on the T778 information sheet).
b) The other person attended school and was enrolled in a full-time educational program (see "Educational program" on the T778 information sheet).
c) The other person was not capable of caring for children because of a mental or physical infirmity. That person must have been confined for a period of at least two weeks to a bed or wheelchair, or as a patient in a hospital, or other similar institution. Attach a statement from the attending physician certifying this information.
d) The other person was not capable of caring for children because of a mental or physical infirmity, and this situation is likely to continue for an indefinite period. Attach a statement from the attending physician certifying this information.
e) The other person was confined to a prison or similar institution for a period of at least two weeks.
f) You and your spouse or common-law partner were, due to a breakdown in your relationship, living separate and apart at the end of
2010 and for a period of at least 90 days beginning in 2010, but you reconciled before March 1, 2011. x 2.5 % =

Line 4 (in Part B)
Number of months in 2010 that the situation in a) existed (other than a month that includes a week that any of the situations in b) to f) existed)

x line 10

=

11

x line 10

=
6798

12
13

zle hz Number of weeks in 2010 that any of the situations in b) to f) existed
Add lines 11 and 12
Enter the amount from line 7 (in Part B) or line 13, whichever is less.
If you attended school in 2010, go to Part D.
Otherwise, enter this amount on line 214 of your return

10

Your allowable deduction

14

Part D - Are you enrolled in an educational program in 2010?

Complete Part D if, at any time in 2010, either of the following situations applied to you:
• You were the only person making a claim, line 7 equals line 6 in Part B, and you were enrolled in a program (see "Educational program"). • You were the person with the higher net income, line 7 equals line 6 in Part B, and, at the same time in 2010, you and another person (as described under "Who can claim child care expenses?") were enrolled in a program (see "Educational program"). But first, complete Part C.
Part D does not apply to the person with the lower net income, since the other person will claim this part of the deduction for both of them.

Line 4 (in Part B)

4,000.00

100 00 =

16

x line 15

100 00 =
6801

17
18

Line 4 (in Part B) minus line 9 (in Part B) or line 14 (in Part C), whichever applies to you
Line 5 (in Part B) minus line 9 (in Part B) or line 14 (in Part C), whichever applies to you
Enter your net income (not including amounts on line 214 or 235)
If you completed Part C: Line 13 (in Part C) minus line 6 (in Part B)

41,143 59 X 2/3 =

Enter the amount from line 18, 19, 20, 21, or (if it applies) 22, whichever is least.
Enter the amount from line 9 (in Part B) or line 14 (in Part C), whichever applies to you.
Add line 23 and line 24. Enter this amount on line 214 of your return.
Your allowable deduction

186

100 00 15

x line 15

d

Number of weeks in 2010 during which you were enrolled in a full-time educational program. If there was another person (as described under "Who can claim child care expenses?"), he or she must also have been enrolled in a full-time educational program during the same weeks.
Number of months (other than any month that includes a week used to calculate the amount on line 16) in 2010 during which: there was no other person (as described under "Who can claim child care expenses?") and you were enrolled in a part-time educational program; or you and the other person were enrolled in a full-time or part-time educational program during the same months.
Add lines 16 and 17

x 2.5 % =

2,100 00 19
1,200 00 20
27,429 06 21
22
23
24
25

Privacy Act, Personal Information Bank number CRA PPU 005
Page 2 of 2

Tax Software Assignment Problem - Chapter 9
Walford, Mary-Chap 9P SIN: 527 000 129
Canada Revenue
Agency

Agence du revenu du Canada

Child Care Expenses Deduction for 2010

Read the attached information sheet. On the sheet we define child care expenses, eligible child, net income, earned income, and educational program. For more details, see Interpretation Bulletin IT-495, Child Care Expenses.
Each person claiming the child care expenses deduction must attach a completed Form T778 to his or her return. Do not include receipts, but keep them in case we ask to see them.
If you are the only person claiming child care expenses, complete parts A and B, and, if it applies, Part D.
If there is another person (as described under "Who can claim child care expenses?") and you are the one with the lower net income, complete parts A and B.
If there is another person (as described under "Who can claim child care expenses?") and you are the one with the higher net income, complete parts A, B, C, and, if it applies, Part D.

Child care expense details
Name of child
William

Organization or name and social insurance number
Gaye Normandin SIN 527-000-392
___ ___ ___
___ ___ ___
**Enter the # of weeks spent at boarding school, overnight sports school or overnight camp.

# weeks**

Amount
3,100.00

Claim
3,100.00

Part A - Total child care expenses
•
•

List the first and last names and the dates of birth of all your eligible children, even if you did not pay child care expenses for all of them.
Indicate who received the payments. Provide the name of the child care organization or the name and social insurance number of the individual.
Child's Last and First Name

Gravel, William

Date of Birth

2003-02-24

Name and SIN of individual, or name of organization

Number of weeks

Child care expenses paid

Gaye Normandin SIN 527-000-392

zle hz 3,100 00
3,100 00
Total child care expenses
Note: The maximum you can claim for expenses that relate to a stay in a boarding school (other than education costs) or an overnight camp (including an overnight sports school) is $175 per week for a child included on line 1 in Part B, $250 per week for a child included on line 2, and $100 per week for a child included on line 3.
Enter any child care expenses included above that were incurred in 2010 for a child who was 18 or older.

6795

Part B - Basic limit for child care expenses
Number of eligible children:

Born in 2004 or later, for whom the disability amount cannot be claimed

Born in 2010 and earlier, for whom the disability amount can be claimed

*

Born in 1994 to 2003, (or born in 1993 or earlier, with a mental or physical infirmity, for whom the disability amount cannot be claimed)
Add lines 1 to 3
Enter your total child care expenses from Part A.
Enter your earned income.

X $7,000 =

1

X $10 000 = 6796

2

1 X $4,000 =

152,866 08 X 2/3 =

Enter the amount from line 4, 5, or 6, whichever is least

4,000 00
4,000 00
3,100 00
101,910 72

3
4
5
6

3,100 00 7

d

If you are the person with the higher net income, go to Part C. Leave lines 8 and 9 blank.

Enter any child care expenses that the other person (as described under "Who can claim child care expenses?") with the higher net income deducted on line 214 of his or her 2010 return.
Line 7 minus line 8. If you attended school in 2010 and you are the only person making a claim, also go to Part
D. Otherwise, enter this amount on line 214 of your return.
Your allowable deduction

8
9

* Attach Form T2201, Disability Tax Credit Certificate. If this form has already been filed for the child, attach a note to your return showing the name and social insurance number of the person who filed the form and the tax year for which it was filed.

T778 E (10)

187

Page 1 of 2

Tax Software Assignment Problem - Chapter 9
Part C - Are you the person with the higher net income?
Complete Part C if, in 2010, another person (as described under "Who can claim child care expenses?") with lower net income was in a situation described below. Give the name, social insurance number, and the net income of the other person, and tick the boxes that apply.
Name of person with lower net income
Gravel, Seymour-Chap 9P

X

Social insurance number
527 000 079

Net income
40,006 41

a) The other person attended school and was enrolled in a part-time educational program (see "Educational program" on the T778 information sheet).
b) The other person attended school and was enrolled in a full-time educational program (see "Educational program" on the T778 information sheet).
c) The other person was not capable of caring for children because of a mental or physical infirmity. That person must have been confined for a period of at least two weeks to a bed or wheelchair, or as a patient in a hospital, or other similar institution. Attach a statement from the attending physician certifying this information.
d) The other person was not capable of caring for children because of a mental or physical infirmity, and this situation is likely to continue for an indefinite period. Attach a statement from the attending physician certifying this information.
e) The other person was confined to a prison or similar institution for a period of at least two weeks.
f) You and your spouse or common-law partner were, due to a breakdown in your relationship, living separate and apart at the end of
2010 and for a period of at least 90 days beginning in 2010, but you reconciled before March 1, 2011.
4,000.00

Line 4 (in Part B)
Number of months in 2010 that the situation in a) existed (other than a month that includes a week that any of the situations in b) to f) existed)

x line 10

100 00 =

12 x line 10

100 00 =
6798

zle hz Number of weeks in 2010 that any of the situations in b) to f) existed
Add lines 11 and 12
Enter the amount from line 7 (in Part B) or line 13, whichever is less.
If you attended school in 2010, go to Part D.
Otherwise, enter this amount on line 214 of your return

x 2.5 % =

Your allowable deduction

100 00 10

11
1,200 00 12
1,200 00 13
1,200 00 14

Part D - Are you enrolled in an educational program in 2010?

Complete Part D if, at any time in 2010, either of the following situations applied to you:
• You were the only person making a claim, line 7 equals line 6 in Part B, and you were enrolled in a program (see "Educational program"). • You were the person with the higher net income, line 7 equals line 6 in Part B, and, at the same time in 2010, you and another person (as described under "Who can claim child care expenses?") were enrolled in a program (see "Educational program"). But first, complete Part C.
Part D does not apply to the person with the lower net income, since the other person will claim this part of the deduction for both of them.

Line 4 (in Part B)

4,000.00

100 00 =

16

x line 15

100 00 =
6801

17
18

Line 4 (in Part B) minus line 9 (in Part B) or line 14 (in Part C), whichever applies to you
Line 5 (in Part B) minus line 9 (in Part B) or line 14 (in Part C), whichever applies to you
160,426 64 X 2/3 =
Enter your net income (not including amounts on line 214 or 235)
If you completed Part C: Line 13 (in Part C) minus line 6 (in Part B)
Enter the amount from line 18, 19, 20, 21, or (if it applies) 22, whichever is least.
Enter the amount from line 9 (in Part B) or line 14 (in Part C), whichever applies to you.
Add line 23 and line 24. Enter this amount on line 214 of your return.
Your allowable deduction

188

100 00 15

x line 15

d

Number of weeks in 2010 during which you were enrolled in a full-time educational program. If there was another person (as described under "Who can claim child care expenses?"), he or she must also have been enrolled in a full-time educational program during the same weeks.
Number of months (other than any month that includes a week used to calculate the amount on line 16) in 2010 during which: there was no other person (as described under "Who can claim child care expenses?") and you were enrolled in a part-time educational program; or you and the other person were enrolled in a full-time or part-time educational program during the same months.
Add lines 16 and 17

x 2.5 % =

2,800 00 19
1,900 00 20
106,951 09 21
22
23
24
25

Privacy Act, Personal Information Bank number CRA PPU 005
Page 2 of 2

Tax Software Assignment Problem - Chapter 9
Gravel, Seymour-Chap 9P (D) SIN: 527 000 079
Canada Revenue
Agence du revenu
Agency
du Canada

DESIGNATION OF A PROPERTY AS A PRINCIPAL RESIDENCE
BY AN INDIVIDUAL (OTHER THAN A PERSONAL TRUST)

Use this form to designate a property as a principal residence and to calculate the capital gain for the year if you: disposed of, or were considered to have disposed of, your principal residence, or any part of it; or granted someone an option to buy your principal residence, or any part of it.
Attach one copy of this form to your return only if you have to report a capital gain.
If you designate the property as your principal residence for all the years in which you owned it, there is no capital gain.
Note: If you were not a resident of Canada for the entire time you owned the designated property, contact us at1-800-959-8281.
Your period of non-residence may reduce or eliminate the availability of the principal residence exemption.
The term spouse used throughout this form applies to a person to whom you are legally married. For 1993 to 2000, a spouse included a common-law spouse. For
2001 and future years, the reference to spouse is replaced with spouse or common-law partner as defined in the section called "Definitions" in Guide T4037,Capital
Gains.
Note: If you made an election to have your same-sex partner considered your common-law partner for 1998, 1999 and/or 2000, then, for those years, your common-law partner also could not designate a different housing unit as his or her principal residence.
If you disposed of, or were considered to have disposed of, a property for which you or your spouse or common-law partner filed Form T664 or T664(Seniors),
Election to Report a Capital Gain on Property Owned at the End of February 22, 1994, use this form to calculate the capital gain for the year if: the property was your principal residence for 1994; or you are designating the property in this form as your principal residence for any tax year.
You may be entitled to a reduction as a result of the capital gains election. To calculate this reduction, use Form T2091(IND)-WS, Principal Residence Worksheet.
You can get this form from our Web site at www.cra.gc.ca or by calling us at 1-800-959-2221.
For more information about designating a principal residence and what qualifies as a principal residence, see Interpretation Bulletin IT-120,Principal Residence, or the chapter called "Principal residence" in Guide T4037, Capital Gains.

zle hz Designation

For the purpose of this form, the acquisition date is the date on which you acquired or last reacquired the property, or December 31, 1971, whichever is later.
However, if you or your spouse or common-law partner filed Form T664 or T664(Seniors), you or your spouse or common-law partner are not considered to have disposed of and immediately reacquired the property as a result of that election.
Note:

If the property was designated as a principal residence for the purpose of filing Form T664 or T664(Seniors), you have to include those previously designated tax years as part of your principal residence designation.

Description of property designated:

50 King Street, Moncton, NB E1C 4M2

I, Gravel, Seymour-Chap 9P following tax years ending after the acquisition date:
a)

, hereby designate the property described above to have been my principal residence for the

(specify which tax years after 1971 and before 1982)

b)

1997 to 2008

(specify which tax years after 1981)

For those years before 1982, I confirm that I have not designated any other property as my principal residence.

d

For those years after 1981, I also confirm that neither I, nor my spouse or common-law partner (who was not separated and living apart from me throughout the year under a judicial separation or written separation agreement), nor any of my children (who were under 18 and unmarried or not in a common-law partnership throughout the year) designated any other property as a principal residence. For any tax year after 1981 for which I am designating the property and throughout which I was under 18 and unmarried or not in a common-law partnership, I also confirm that neither my mother, father, nor any of my brothers and sisters (who were under 18 and unmarried or not in a common-law partnership throughout the year) designated any other property.
Signature

Social Insurance Number

Date

527 000 079

2011-05-27

T2091(IND) E (10)

189

Page 1 of 3

Tax Software Assignment Problem - Chapter 9
Gravel, Seymour-Chap 9P (D) SIN: 527 000 079

Information needed to calculate the capital gain
Number of tax years for which the property is designated as a principal residence:
Before 1982 (as per designation above)
After 1981 (as per designation above)

1

Total number of years designated (line 1 plus line 2)

+
=

12 2
12 3

+
=

14 5
14 6

Number of tax years ending after the acquisition date in which you owned the property (jointly with another person or otherwise): Before 1982
After 1981

4

Total number of years owned (line 4 plus line 5)

240,000 00 7

Proceeds of disposition or deemed disposition
Outlays and expenses related to the disposition
Adjusted cost base at the time of disposition (if you or your spouse or common-law partner filed Form T664 or T664(Seniors) for this property, do not take into consideration any increase to the adjusted cost base as a result of that election)
Adjusted cost base on December 31, 1981
Fair market value on December 31, 1981
Adjustments to the cost base made after 1981 (for example, capital expenditures)

8

195,000 00 9
10
11
12

Calculation of the capital gain
Part 1

240,000 00 13

Line 14 plus line 15

zle hz Proceeds of disposition or deemed disposition (line 7)
Adjusted cost base at the time of disposition (line 9)
Outlays and expenses (line 8)

Capital gain before principal residence exemption (line 13 minus line 16)
Line 17
Line 3 plus 1 (one year is granted by law)
Multiply line 18 by line 19
Line 6
Divide line 20 by line 21

195,000 00
+
=

195,000 00

x
=
÷
=

45,000 00
13
585,000 00
14
41,785 71

14
15

195,000 00 16
45,000 00 17

=

41,785 71 22
3,214 29 23

18
19
20
21

Net capital gain from Part 1 (line 17 minus line 22; if negative, enter "0")

Part 2

=

Is the property disposed of one of two or more properties that qualify as principal residences a family member owned on December 31, 1981, and continuously thereafter until its disposition?
Yes X No
You will find a definition of family in the chapter called "Principal residence" in Guide T4037, Capital Gains. In all other cases, do not complete Part 2 and enter the amount from line 23 above on line 53 in Part 3 below.

Fair market value on December 31, 1981 (line 11)
Adjusted cost base on December 31, 1981 (line 10)

d

a) Pre-1982 gain - If you designated the property as a principal residence for all the years you owned it before 1982, do not complete lines 24 to 31 and enter "0" on line 32.

Pre-1982 gain before principal residence exemption (line 24 minus line 25)
Line 26
Line 1 plus 1 (one year is granted by law)
Multiply line 27 by line 28
Line 4
Divide line 29 by line 30
Pre-1982 gain (line 26 minus line 31; if negative, enter "0")

x
=
÷
=

24
25

=

26

27
28
29
30

=

31
32

T2091(IND) E (10)

190

Page 2 of 3

Tax Software Assignment Problem - Chapter 9
Gravel, Seymour-Chap 9P (D) SIN: 527 000 079

Part 2
b) Post-1981 gain - If you designated the property as a principal residence for all the years you owned it after 1981, enter "0" on line 44 and complete area d) below.
33

Proceeds of disposition or deemed disposition (line 7)
Fair market value on December 31, 1981 (line 11). If the fair market value of the property on
December 31, 1981, is more than the amount on line 33, enter "0" on line 44 and complete areas c) and d) below
Adjustments made to the cost base after 1981 (line 12)
Outlays and expenses (line 8)
Add lines 34 to 36
Post-1981 gain before principal residence exemption (line 33 minus line 37)
Line 38
Line 2
Multiply line 39 by line 40
Line 5
Divide line 41 by line 42

+
+
=

x
=
÷
=

34
35
36

=

43

=

240,000 00 46

38

41
42

c) Post-1981 loss
Fair market value on December 31, 1981 (line 11)
Proceeds of disposition or deemed disposition (line 7)

44
45

Post-1981 loss (line 45 minus line 46; if negative, enter "0")

zle hz d) Net capital gain from Part 2
Pre-1982 gain, if any (line 32)
Post-1981 gain, if any (line 44)

Net capital gain from Part 2 (line 50 minus line 51; if negative enter "0")

Part 3

37

39
40

Post-1981 gain (line 38 minus line 43; if negative, enter "0")

Line 48 plus line 49
Post 1981 loss, if any (line 47)

=

+
=
=

47

48
49
50
51
52

Total capital gain (If you completed Part 2, enter the amount from line 23 or line 52, whichever is less.
3,214 29 53
Otherwise, enter the amount from line 23)
Complete Part 4 only if you or your spouse or common-law partner filed Form T664 or T664(Seniors) for this property. In all other cases, enter the amount from line 53 on line 158 of Schedule 3, Capital Gains (or Losses), for dispositions or deemed dispositions.
Part 4

3,214 29 54

Total capital gain before reduction (line 53)
Reduction as a result of the capital gains election (line 66 of Form T2091(IND)-WS)

=

Capital gain (line 54 minus line 55; if negative, enter "0")

55

3,214 29 56

Enter the amount from line 56 on line 158 of Schedule 3, Capital Gains (or Losses), for dispositions or deemed dispositions.

d

Privacy Act, Personal Information Bank number CRA PPU 005

T2091(IND) E (10)

191

Page 3 of 3

Tax Software Assignment Problem - Chapter 9
Gravel, Seymour-Chap 9P (D) SIN: 527 000 079

T1-2010

Capital Gains (or Losses) in 2010

Schedule 3

Read line 127 in the General Income Tax and Benefit Guide. For more information, read Chapter 2 in guide T4037, Capital Gains.
Attach a copy of this schedule to your return.
Note: If you have a business investment loss, see line 217 in the General guide.

(1)
Year of acquisition (2)
Proceeds of disposition

(3)

(4)

(5)

Adjusted cost base

Outlays and expenses
(from dispositions)

Gain (or loss)
(column 2 minus columns 3 and 4)

1. Qualified small business corporation shares (report, in "3" below, publicly traded shares, mutual fund units, deferral of eligible small business corporation shares, and other shares.)
Number

Name of corp. and class of shares

From T3/T5013 slips
Total 106

Gain (or loss) 107

2. Qualified farm property and qualified fishing property
Address or legal description

Prov./Terr.

From T3/T5013 slips
Total 109
Mortgage foreclosures and conditional sales repossessions - Address or legal description

Gain (or loss) 110

Prov./Terr.

From T5013 slips

Number

zle hz Total 123
Gain (or loss) 124
3. Publicly traded shares, mutual fund units, deferral of eligible small business corporation shares, and other shares
(Report capital gains or losses shown on T5, T5013, T5013A, T4PS and T3 information slips on line 174 or 176)
Name of fund/corp. and class of shares

From T5008 slips
From T1170

Total 131

Gain (or loss) 132

4. Real estate, depreciable property, and other properties
Address or legal description

Prov./Terr.

Total 136

Gain (or loss) 138

5. Bonds, debentures, promissory notes, and other similar properties
Face value

Maturity date

From T1170

Name of issuer

Total 151

Gain (or loss) 153

6. Other mortgage foreclosures and conditional sales repossessions
Address or legal description

Prov./Terr.

d

Total 154
7. Personal-use property (full description)
T2091 (IND) Principal Residence

Gain (or loss) 155

Gain only 158

3,214 29
3,214 29

8. Listed personal property (LPP) (full description)
Note: You can only apply LPP losses against LPP gains.

Subtract: Unapplied LPP losses from other years
Net gain only 159

Capital gains deferral from qualifying dispositions of eligible small business corporation shares
161
(included in 3 above)
Farming and fishing income eligible for the capital gains deduction from the disposition of eligible capital property
173
(for details, see Form T657)
T5, T5013, T5013A, and T4PS Information slips - Capital gains (or losses)
174
T3 information slips - Capital gains (or losses)
176
Capital loss from a reduction in your business investment loss
178
Total of all gains (or losses) before reserves 191
Reserves from line 6706 of Form T2017 (if negative, show it in brackets and subtract it)
192
Total capital gains (or losses) 197
Multiply the amount on line 197 by 50%.
Enter the taxable capital gains on line 127 of your return.
If it is a net capital loss, see line 127 in the guide.

Taxable capital gains
(or net capital loss) in 2010 199

192

3,214 29
3,214 29

1,607 14
Page 1 of 2

Tax Software Assignment Problem - Chapter 9
Gravel, Seymour-Chap 9P (D) SIN: 527 000 079
Canada Revenue
Agency

Agence du revenu du Canada

STATEMENT OF REAL ESTATE RENTALS
1

Identification
Your name Seymour-Chap 9P Gravel
Fiscal
Year/Month/Day
Year/Month/Day
period:
2010-01-01
to: 2010-12-31
Name and address of person or firm preparing this form

Account Number (15 characters)
_____ ____ RT ____

Your social insurance number 527 000 079
Final year of rental operation? Yes X No
Partnership Business Number (9 digits)
_________
Tax shelter identification number
________
Your % of ownership
100.0000 % Industry code 531111

Income
# of units
Address 50 King Street
City
Moncton
Province NB
Postal code
Address
City
Province __
Postal code
Enter the total of your gross rents
Other related income (for example, premiums and leases, sharecropping)

E1C 4M2

1

zle hz Personal use percentage

Total expense

Advertising
Insurance
Interest
Office expenses
Legal, accounting, and other professional fees
Management and administration fees
Maintenance and repairs
Salaries, wages, and benefits
(including employer's contributions)
Property taxes
Travel
Utilities
Motor vehicle expenses (not including CCA)
Other expenses

9060
9180
9200
9220
9281
9270

8141

12,000 00

8230
8299

12,000 00 a

%
Personal portion

650 00
4,207 25
3,352 71

3,610 00

11,819 96 9949

d

Total
Deductible expenses (total expenses minus personal portion)
Net income (loss) before adjustments (line a minus line b)
Co-owners - Your share of line 9369 above
Minus: Other expenses of the co-owner

8521
8690
8710
8810
8860
8871
8960

12,000 00

___ ___

Gross rental income - (enter this amount on line 160 of your income tax and benefit return)

Expenses

Gross rents

9369
9945
Subtotal

Plus: Recaptured capital cost allowance (co-owners – enter your share of the amount) (see Chapter 3)

180 04
9947

Subtotal
Minus: Terminal loss (co-owners – enter your share of the amount) (see Chapter 3)

9948
Subtotal

Minus: Capital cost allowance (from Area A)
Net income (loss) - If you are a sole proprietor or a co-owner, enter this amount on line 9946
Partnerships - Your share of line d above or the amount from slip T5013 or T5013A
Plus: GST/HST rebate for partners received in the year
Minus: Other expenses of the partner
Your net income (loss) (enter this amount on line 126 of your income tax and benefit return)

11,819 96 b
180 04
180 04 c

180 04
650 00
(469 96)

9936
(469 96) d
(469 96)
9974
9943
9946

(469 96)

T776 (10)

193

Page 1 of 2

Tax Software Assignment Problem - Chapter 9
Gravel, Seymour-Chap 9P (D) SIN: 527 000 079

50 King Street Moncton NB

Area A - Calculation of capital cost allowance claim
1
2
3
4
5*
6
7
8
9
10
Class Undepreciated
Cost of
Proceeds of
UCC after Adjustment for Base amount Rate
CCA for the UCC at the end number capital additions in the dispositions in additions and current-year for capital cost
%
year (col 7 x 8 of the year cost(UCC) at year (Areas B the year (Areas dispositions additions (1/2 x allowance or a lesser
(col 5 - 9) start of year and C)
D and E)
(col 2 + 3 - 4) (col 3 - 4)). If
(col 5 - 6) amount) negative, enter
"0"
1
150,000.00
150,000.00
4
8
1,350.00
700.00
650.00
650.00
20
650.00
Total CCA claim for the year **
*

If you have a negative amount in this column, add it to income as a recapture under "Recaptured capital cost allowance" on line 9947 on page 1 of this form. If there is no property left in the class and there is a positive amount in the column, deduct the amount from income as a terminal loss under "Terminal loss" on line 9948 on page 1 of this form. For more information, read Chapter 3 of guide T4036, Rental Income.

** Sole proprietors and partnerships - Enter the total claim on line 9936 on page 1. Co-owners - Enter only your share of the total claim on line 9936 on page 1 of this form.

Area B - Details of equipment and other property additions in the year
1
Class

2
Property details

3
Total cost

4
Personal portion
(if applicable)

5
Rental portion
(Col 3 - Col 4)

Total equipment and other property additions in the year 9925

Area C - Details of building and leasehold interest additions in the year
1
Class

2
Property details

3
Total cost

zle hz 4
Personal portion
(if applicable)

5
Rental portion
(Col 3 - Col 4)

Total building additions in the year 9927

Area D - Details of equipment and other property dispositions in the year
1
Class

2
Property details

8 Appliances
Note:

3
4
Proceeds of
Personal portion disposition (if applicable)
(should not be more than the capital cost)
700.00
Total equipment and other property dispositions in the year 9926

5
Rental portion
(Col 3 - Col 4)

700.00
700.00

If you disposed of rental property in the year, see Chapter 3 in Guide T4036, Rental Income, for information about your proceeds of disposition.

Area E - Details of building and leasehold interest dispositions in the year
1
Class

2
Property details

Note:

If you disposed of rental property in the year, see Chapter 3 in Guide T4036, Rental Income, for information about your proceeds of disposition.

d

1 Building

3
4
Proceeds of
Personal portion disposition (if applicable)
(should not be more than the capital cost)
150,000.00
Total building dispositions in the year 9928

5
Rental portion
(Col 3 - Col 4)

150,000.00
150,000.00

Area F - Details of land additions and dispositions in the year
Cost of all land additions in the year
Proceeds from all land dispositions in the year
Note: You cannot claim capital cost allowance on land.

9923
9924

194

45,000.00

Privacy Act, Personal Information Bank number CRA PPU 005

Solution To AP Ten - 1

CHAPTER TEN SOLUTIONS
Solution to Assignment Problem Ten - 1
Part A
Mr. Detwiller’s Net Income For Tax Purposes would be calculated as follows:
Income Under ITA 3(a):
Net Employment Income
Eligible Dividends
Gross Up
Income Under ITA 3(b):
Taxable Capital Gains
Allowable Capital Losses

$56,000
7,800
3,198
(

$66,998

$ 5,400
8,200)

Balance From ITA 3(a) And (b)
Subdivision e Deductions

Nil
(

Balance From ITA 3(c)
Deductions Under ITA 3(d):
Net Rental Loss

$66,998
2,500)
$64,498

(

zle hz Net Income For Tax Purposes

9,000)
$55,498

Mr. Detwiller’s Net Income For Tax Purposes is $55,498 and he has a net capital loss carry over of $2,800 ($5,400 - $8,200).

Part B - Case 1

Mr. Detwiller’s 2010 Earned Income would be calculated as follows:
Net Employment Income
Add Back RPP Contributions
Net Rental Loss

$56,000
1,500
( 9,000)

2010 Earned Income

$48,500

d

Given this, his maximum 2011 contribution would be calculated as follows:
Unused Deduction Room - End Of 2010
Annual Addition - Lesser Of:
• 2011 RRSP Dollar Limit = $22,450
• 18% of 2010 Earned Income Of $48,500 = $8,730
Less 2010 PA ($1,500 + $3,000 + $1,000)
2011 RRSP Deduction Limit
Undeducted Contributions From Previous Years
Allowable Excess Amount
Maximum RRSP Contribution

$10,000

(
(

8,730
5,500)
$13,230
4,500)
2,000
$10,730

If Mr. Detwiller contributes this amount of $10,730, his deduction will be equal to $13,230 and he will carry forward RRSP contributions of $2,000 ($4,500 + $10,730 - $13,230).

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Solution To AP Ten - 1
Part B - Case 2
Mr. Detwiller’s 2010 Earned Income would be calculated as follows:
Net Employment Income
Net Rental Loss

(

Earned Income

$56,000
9,000)
$47,000

Given this, his maximum 2011 contribution would be calculated as follows:
Unused Deduction Room - End Of 2010
Annual Addition - Lesser Of:
• 2011 RRSP Dollar Limit = $22,450
• 18% of 2010 Earned Income Of $47,000 = $8,460
Less 2010 PA

$10,000
8,460
4,500)

(

2011 RRSP Deduction Limit
Undeducted Contributions From Previous Years
Allowable Excess Amount

(

Maximum RRSP Contribution

$13,960
4,500)
2,000
$11,460

zle hz If Mr. Detwiller contributes this amount of $11,460, his deduction will be equal to $13,960 and he will carry forward RRSP contributions of $2,000 ($4,500 + $11,460 - $13,960).

Part B - Case 3

Mr. Detwiller’s 2010 Earned Income would be calculated as follows:
Net Employment Income
Net Rental Loss
Business Income
Earned Income

(

$ 56,000
9,000)
220,000
$267,000

Given this, his maximum 2011 contribution would be calculated as follows:
$10,000

d

Unused Deduction Room - End of 2010
Annual Addition - Lesser Of:
• 2011 RRSP Dollar Limit = $22,450
• 18% of 2010 Earned Income Of $267,000 = $48,060
Less 2010 PA
2011 RRSP Deduction Limit
Undeducted Contributions From Previous Years
Allowable Excess Amount
Maximum RRSP Contribution

22,450
Nil
(

$32,450
4,500)
2,000
$29,950

If Mr. Detwiller contributes this amount of $29,950, his deduction will be equal to $32,450 and he will carry forward RRSP contributions of $2,000 ($4,500 + $29,950 - $32,450).

196

Canadian Tax Principles 2011/2012 - Solutions Manual

Solution To AP Ten - 2

Solution to Assignment Problem Ten - 2
Part A
Ms. Wheeler’s net employment income for 2010 would be $20,800, her gross salary of
$22,000, reduced by her RPP contributions of $1,200.
Part B
The annual addition for 2011 would be the lesser of $22,450 and 18 percent of Earned
Income for 2010. The latter amount would be calculated as follows:
Net Employment Income (Part A)
Add Back RPP Contributions
Spousal Support Received [(6)($1,200)]
Net Business Loss

$20,800
1,200
7,200
( 2,500)

Earned Income
Percent

$26,700
18%

Annual Addition (Less than $22,450)

$ 4,806

Ms. Wheeler’s maximum deductible RRSP contribution would be calculated as follows:

zle hz Opening Unused Deduction Room
Annual Addition
Less 2010 PA ($1,200 + $1,200)

Maximum Deductible RRSP Contribution

Nil
$ 4,806
( 2,400)
$ 2,406

Part C
As Ms. Wheeler has made no contributions prior to 2011, she has no undeducted contributions. In addition, she has interest income and dividends that are subject to current Tax
Payable. Given this, as well as the fact that her lump-sum payment of $80,000 and $50,000 inheritance leaves her with cash in excess of her needs, she should contribute the maximum deductible amount of $2,406 for 2011.

d

While she could deduct the $2,406 in 2011, it would be advantageous to defer this deduction until 2012 when she expects to be in a higher tax bracket. At the federal level, the tax savings will be $626 [(26%)($2,406)] in 2012, as compared to $361 [(15%)($2,406)] in 2011.
Given her available funds, Ms. Wheeler should be advised to consider contributing the maximum allowable amount to a Tax Free Savings Account, as well as over contributing up to
$2,000 to her RRSP.
How much she should contribute to a TFSA and overcontribute to her RRSP would depend on a number of factors as discussed in Chapter 10. Although she would not be able to deduct these contributions, they would enjoy the benefit of having any income earned while in the plan compounded on a tax free basis. An over contribution to her RRSP would be deductible in a future year with sufficient RRSP deduction room.
All of these contributions should be made as soon as possible in order to maximize the tax free earnings that will accrue inside of her RRSP and/or TFSA.

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197

Solution To AP Ten - 3

Solution to Assignment Problem Ten - 3
The annual addition for 2011 would be the lesser of $22,450 and 18 percent of Earned
Income for 2010. The latter amount would be calculated as follows:
Salary
Taxable Benefits

$86,200
5,600

Gross Employment Income
Less: Union Dues

$91,800
(
450)

Net Employment Income
Business Loss
Rental Income
Common-Law Partner Support Paid

$91,350
4,500)
6,700
( 12,000)
(

2010 Earned Income
Rate

$81,550
18%

Annual Addition (Less Than $22,450)

$14,679

Notes
While Ms. Storm’s RPP contribution would be deducted in determining Net
Income For Tax Purposes, it is not deducted in calculating employment income for RRSP Earned Income purposes.

·

Neither the eligible dividends nor the interest are part of RRSP Earned Income.

zle hz ·

Ms. Storm’s maximum deductible RRSP contribution would be calculated as follows:
Opening Unused RRSP Deduction Room
Annual Addition
2010 Pension Adjustment [(2)($2,500)]

$17,000
14,679
( 5,000)

RRSP Deduction Limit For 2011
Undeducted Contributions From Prior Years

(

Maximum Deductible Contribution For 2011

$26,679
8,000)
$18,679

d
198

Canadian Tax Principles 2011/2012 - Solutions Manual

Solution To AP Ten - 4

Solution to Assignment Problem Ten - 4
Part A
For purposes of determining her maximum 2011 RRSP contribution, 2010 Earned Income would be calculated as follows:
Net Employment Income *
Salary
Employee Stock Option Benefit
Benefit On Interest Free Loan
Deductible Employment Expenses
Business Income
Royalty Income (Own Invention)
Rental Loss
Spousal Support Payments

$120,000
5,000
5,000
(
4,000)

2010 Earned Income

$126,000
35,000
5,000
( 10,000)
( 12,000)
$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.

·
·
·
·

zle hz 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 2011 is as follows: $21,000
22,000

Opening Unused RRSP Deduction Room
Annual Addition - Lesser Of:
• 2011 RRSP Dollar Limit = $22,450
• 18 Percent Of 2010 Earned Income
[(18%)($144,000)] = $25,920
2010 PA

$43,000

d

2009 RRSP Dollar Limit
2010 RRSP Dollar Limit

Maximum Deductible RRSP Contribution For 2011

(

22,450
9,000)
$56.450

The calculation begins with the determination of her unused deduction room at the end of
2010. As she has made no contributions to either an RRSP or an RPP in years prior to 2010 and no contribution to an RRSP in 2010, her unused deduction room at the end of 2010 would be the RRSP Dollar Limit for the years 2009 and 2010.
To this amount we add $22,450, the lesser of the 2011 RRSP Dollar Limit of $22,450 and
$25,920 (18 percent of Ms. Goodman’s 2010 Earned Income of $144,000).
From this total we subtract Ms. Goodman’s 2011 PA of $9,000.

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199

Solution To AP Ten - 5

Solution to Assignment Problem Ten - 5
The excess RRSP contributions amount at the end of each month of 2011 would be calculated as follows:

Undeducted Contributions
At Beginning Of Month
Add: 2011 Contribution
Deduct: 2011 Withdrawal
Undeducted Contributions
At End Of Month
Deduct: Unused Deduction
Room Carried Forward
Deduct: 2011 Increase In
Unused Deduction Room
Deduct: $2,000 Cushion

January

February

$54,000

$54,000
5,000

March To
November

December

$59,000

$59,000
( 35,000)

$54,000

$59,000

$59,000

$24,000

( 10,000)

( 10,000)

( 10,000)

( 10,000)

(
(

(
(

(
(

(
(

9,000)
2,000)

9,000)
2,000)

9,000)
2,000)

9,000)
2,000)

Monthly Cumulative Excess

$33,000

$38,000

$38,000

$ 3,000

Penalty At 1 Percent Per Month

$

$

$

$

zle hz 330

380

380

30

The total penalty for 2011 is $4,160 [($330)(1) + ($380)(10) + ($30)(1)].

d
200

Canadian Tax Principles 2011/2012 - Solutions Manual

Solution To AP Ten - 6

Solution to Assignment Problem Ten - 6
Retiring Allowance Rollover
If Mr. White accepts his employer’s offer of cash, he has two alternative courses of action.
First, he can do nothing , in which case the full $68,000 will be an addition to his Net Income
For Tax Purposes for the current year. His second alternative will be to transfer some part of the payment to a Registered Retirement Savings Plan (RRSP) on a tax free basis. While he will still have to include the full $68,000 in his income, he will be eligible for a deduction equal to a specified amount of such transfers.
The rules prior to 1989 permit tax free transfers of up to $2,000 per year of service with the employer who is making the payments, plus an additional $1,500 per year of service for each year during which the employer was not making vested contributions to either a Registered
Pension Plan or a Deferred Profit Sharing Plan. For 1989 through 1995, the amount of this transfer is limited to $2,000 per year of post-1988 service. For service after 1995, the transfer is no longer available.
In 2011, Mr. White’s limit would be $31,500 [(12 years)($2,000) + (5 years)($1,500)]. The excess of $36,500 ($68,000 - $31,500) will be taxed in the year in which it is received.

zle hz Alternatives Available
As to the appropriate course of action, it depends on Mr. White’s circumstances. If he anticipates finding another job within a short period of time and has no immediate need for the additional cash, the tax free transfer to an RRSP is probably the most appropriate course of action. He could use the excess retiring allowance to make his maximum regular RRSP contribution.
Although he could make a non-deductible RRSP contribution of up to $2,000 without being assessed any penalty, there are other alternative savings plans available to him. If he has available funds, he should consider contributions to an RESP for the triplets and TFSAs for himself and his wife.
On the other hand, if he wishes to take some time off, or is uncertain as to his future job prospects, he may wish to retain all of the cash on a personal basis. Note, however, if the offer is accepted late in the year after Mr. White has received most of his annual income, the retention of the additional $68,000 would likely push Mr. White into the highest tax bracket. This could be avoided by putting the maximum of $31,500 into an RRSP, with funds withdrawn as needed in the following year.

d

Another possibility is that Mr. White is at or near retirement age. If this is the case, he will probably wish to transfer the maximum of $31,500 to an RRSP in order to gain flexibility in terms of when the income will be taxed during his retirement years.
If the funds are subsequently transferred to a RRIF or withdrawn from the RRSP in the form of an annuity, the payments will be eligible for the pension income tax credit after Mr. White reaches age 65. The RRIF and annuity payments will also be eligible for the pension income splitting provisions (see Chapter 9).
As a final note, if Mr. White chooses to make a tax free transfer to an RRSP, the transaction does not change his RRSP Deduction Limit for the year. That is, the maximum deductible RRSP contribution for 2011 will be the same, whether or not he transfers part of the retiring allowance into his plan.

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201

Solution To AP Ten - 7

Solution to Assignment Problem Ten - 7
Case A
The required 2011 PA would be calculated as follows:
Employer’s Contribution To RPP
Employer’s Contribution To DPSP
Mr. Brokow’s Contribution To RPP

$3,200
1,100
1,500

PA

$5,800

Case B
The required 2011 PA would be calculated as follows:
[(9)(1.65%)($52,000)] = $7,722
Note that the contributions made during 2011 have no influence on the PA for a defined benefit RPP.

zle hz Case C
Bob’s 2011 PSPA would be calculated as follows:

[(9)(1.10%)($48,000)(2 Years)] = $9,504

The 2011 PA will reflect the benefits earned during 2011.

Case D
Marianne’s 2011 PSPA is based on the PAs that would have been reported in the relevant years, less the PAs actually reported. The calculation would be as follows:
[(9)(1.7% - 1.4%)($52,000)(2 Years)] = $2,808

This $2,808 PSPA would reflect the increase in benefits that occurred in January, 2011. In addition to this PSPA, there would also be a PA based on her 2011 earnings, multiplied by the benefit factor of 9 and the new formula rate of 1.7 percent.

d
202

Canadian Tax Principles 2011/2012 - Solutions Manual

Solution To AP Ten - 8

Solution to Assignment Problem Ten - 8
Part A - Spousal RRSP Contribution
As noted in the problem, we are to assume that Ahmed’s 2010 Earned Income is equal to his
2011 Earned Income. In order to calculate the maximum deductible spousal RRSP contribution, net employment income and net rental income must first be calculated.

Net Employment Income
Even though Ahmed is no longer an employee, he has employment income related to the exercise of his stock option shares. The calculations are as follows:
Exercise Date Value [(5,000)($21)]
Option Price [(5,000)($15)]

(

Employment Income Inclusion

$105,000
75,000)
$ 30,000

There will be a deduction in the determination of Taxable Income equal to one-half of this inclusion or $15,000.

Net Rental Income
The required calculations here are as follows:

zle hz Revenues ($34,000 + $42,000 + $26,000)
Recapture On Property A ($560,000 - $422,000)
Expenses Other Than CCA
($29,000 + $37,000 + $23,000)
CCA (Note 1)

$102,000
138,000
(
(

Net Rental Income
Note 1

89,000)
38,240)
$112,760

CCA on the rental properties would be calculated as follows:
Property A

Property B

Property C

UCC On January 1
Dispositions - Capital Cost

$422,000
( 560,000)

$571,000
N/A

$385,000
N/A

Subtotal
Recapture

($138,000)
138,000

$571,000
N/A

$385,000
N/A

CCA

d

Balance Subject To CCA
Rate

Nil
N/A

$571,000
4%

$385,000
4%

Nil

$ 22,840

$ 15,400

The total 2011 CCA would be $38,240 ($22,840 + $15,400).

RRSP Deduction
Since we are assuming that Ahmed’s 2010 Earned Income is equal to his 2011 Earned Income, the required figure is calculated as follows:
Employment Income
Net Rental Income

$ 30,000
112,760

2010 Earned Income (Assumed To Be Equal To 2011)

$142,760

The maximum deductible spousal RRSP contribution for 2011 would be the lesser of $25,697
[(18%)($142,760)] and the 2011 RRSP Dollar Limit of $22,450. Using the lesser figure, the maximum deductible contribution would be $22,450.

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203

Solution To AP Ten - 8
Taxable Capital Gains
There will be a taxable capital gain on the sale of the shares, calculated as follows:
Proceeds Of Disposition [(5,000)($23)]
Adjusted Cost Base (FMV At Exercise)

$115,000
( 105,000)

Capital Gain
Inclusion Rate

$ 10,000
1/2

Taxable Capital Gain

$

5,000

In addition, there will be a capital gain on the sale of Property A, calculated as follows:
Land
Proceeds Of Disposition
Adjusted Cost Base/Capital Cost

Building

$340,000
( 100,000)

$620,000
( 560,000)

$240,000

$ 60,000

Capital Gain

Under ITA 40(1)(a)(iii), the amount that can be deducted as a capital gains reserve is equal to the lesser of:
[(Capital Gain)(Proceeds Not Yet Due ÷ Total Proceeds)]
[(Capital Gain)(20%)(4 - Number Of Preceding Years Ending After Disposition)]

zle hz ·
·

Ahmed has only received 10 percent of the sale price in cash. As this is less than the minimum
20 percent, the taxable capital gain would be calculated as follows:
Total Capital Gain ($240,000 + $60,000)
Maximum Reserve [($300,000)(20%)(4 - 0)]

$300,000
( 240,000)

Capital Gain
Inclusion Rate

$ 60,000
1/2

Taxable Capital Gain For 2011

$ 30,000

d

Minimum RRIF Withdrawal
For individuals under the age of 79, the minimum RRIF withdrawal can be based on dividing the fair market value of the assets in the plan at the beginning of the year by the number 90, less the registrant’s age. However, the registrant can also base this calculation on the age of his spouse and, if the spouse is younger, this will minimize the required withdrawal. As Adrianna is aged 66, the minimum withdrawal would be $52,083 [$1,250,000 ÷ (90 - 66)].
Pension Income Splitting
The election to split CPP benefits is provided for in the Canada Pension Plan regulations and results in an actual split of the payments. The ITA 60.03 legislation allows certain other types of pension income to be split. Both payments of RPPs and withdrawals from RRIFs qualify for this split which is implemented solely on the tax returns. The total qualifying pension income for Ahmed is $138,083 ($86,000 + $52,083), one-half of which is $69,042.
RDSP Contribution
There is no deduction for the RDSP contribution and the CDSG has no effect on Ahmed’s tax calculations. 204

Canadian Tax Principles 2011/2012 - Solutions Manual

Solution To AP Ten - 8

Part B - Net Income For Tax Purposes
Based on the preceding calculations and other information provided in the problem, Ahmed’s
2011 minimum Net Income For Tax Purposes can be calculated as follows:
RPP Receipts (Pension Split)
CPP Receipts After Election To Split With Wife
Employment Income
Net Rental Income
Spousal RRSP Deduction - Part A
Taxable Capital Gain - Option Shares
Taxable Capital Gain - Rental Property
Minimum RRIF Withdrawal (Pension Split)
Interest From Canadian Sources
Eligible Dividends Received
Gross Up [(41%)($2,200)]
Foreign Source Interest (100 Percent)

$ 86,000
5,500
30,000
112,760
( 22,450)
5,000
30,000
52,083
18,000
2,200
902
3,000

Net Income For Tax Purposes Before Pension Split
$322,995
Income Allocated To Wife [(1/2)($86,000 + $52,083)] ( 69,042)
Net Income For Tax Purposes

$253,953

zle hz Part B - Taxable Income

Ahmed’s Taxable Income would be calculated as follows:
Net Income For Tax Purposes
Stock Option Deduction

(

Taxable Income

$253,953
15,000)
$238,953

Part B - Tax Payable

As the problem requires the minimum Tax Payable, Ahmed has claimed the credits for his son, the medical expenses and charitable donations. These could have been claimed by Adrianna.
The required calculations are as follows:
$27,256
31,944

Tax Before Credits
Tax Credits:
Basic Personal Amount
Spousal (Note 2)
Age (Net Income Too High)
Caregiver - Son
Canada Employment (Stock Option Benefit)
Pension Income
Transfer Of Disability From Son
Medical Expenses (Note 3)

$59,200

d

Tax On First $128,800
Tax On Next $110,153 ($238,953 - $128,800) At 29 Percent

($10,527)
Nil
Nil
( 4,282)
( 1,065)
( 2,000)
( 7,341)
( 13,348)

Total Credit Base
($38,563)
Rate
15%
Charitable Donations
[(15%)($200) + (29%)($4,000 - $200)]
Dividend Tax Credit On Eligible Dividends [(13/23)($902)]
Foreign Tax Credit (Foreign Tax Withheld < 15%)
Federal Tax Payable

Canadian Tax Principles 2011/2012 - Solutions Manual

(

5,784)

(
(
(

1,132)
510)
300)
$51,474

205

Solution To AP Ten - 8
Note 2 While Adrianna has only $6,300 of OAS and the $5,500 in CPP benefits in her name, the added amounts resulting from the pension income splitting of more than $69,000 will be more than enough to eliminate the spousal tax credit. In addition, this additional income will use up all of her tax credits, preventing any transfers to Ahmed.
Note 3

The base for the medical expense tax credit is calculated as follows:

Ahmed And Adrianna ($2,500 + $3,100)
Lesser Of:
• [(3%)($253,953)] = $7,619
• 2011 Threshold Amount = $2,052
Subtotal
Son’s Medical Expenses
Reduced By The Lesser Of:
• $2,052
• [(3%)($Nil)] = Nil

$5,600
(

2,052)
$ 3,548

$9,800
Nil

Allowable Amount Of Medical Expenses

9,800
$13,348

zle hz Part C - Pension Income Splitting

Given Ahmed’s high Taxable Income, even after pension splitting , more than $100,000 is being taxed at the maximum 29 percent federal rate. Despite splitting the maximum amount of pension income, none of Adrianna’s income is taxed at higher than 22 percent federally.
As a result, maximum pension income splitting appears to be advantageous if only federal tax rates are considered.
What should also be considered is the effect of the pension income splitting on the OAS clawback for Adrianna and the effect of provincial income taxes on both Ahmed and Adrianna.
The effect of the OAS clawback and provincial taxes could make it more advantageous to reduce the amount of income splitting so that Adrianna’s Net Income For Tax Purposes is below the OAS clawback income threshold.
While the ability to claim more medical expenses could be a factor in some pension income splitting analyses, it would have very little influence in this case given the high levels of Net
Income involved.

d
206

Canadian Tax Principles 2011/2012 - Solutions Manual

Solution To AP Ten - 9

Solution to Assignment Problem Ten - 9
Part A - RRSP Contribution
In order to determine Mrs. Sorenson’s maximum RRSP deduction for 2011, we need to calculate her Earned Income for 2010. The calculation is as follows:
Net Employment Income
Registered Pension Plan Contributions
Net Business Loss
Royalties
2010 Earned Income

$55,000
2,400
( 8,600)
5,600
$54,400

Given the preceding calculation, her maximum deductible RRSP contribution for 2011 is as follows: Unused Deduction Room - End Of 2010
Annual Addition - Lesser Of:
• 2011 RRSP Dollar Limit = $22,450
• 18% Of 2010 Earned Income Of $54,400 = $9,792
Less 2010 PA

Part B

zle hz Maximum Deductible RRSP Contribution

$ 7,400

(

9,792
5,200)
$11,992

Net Employment Income
Mrs. Sorenson’s net employment income for the year would be calculated as follows:
Gross Salary
Commission Income
Registered Pension Plan Contributions
Profession Dues
Taxable Car Benefit (Note One)
Employment Expenses (Note Two)
Disability Insurance Benefits (Note Three)
Net Employment Income

d

Note One

$67,000
3,150
( 2,750)
(
350)
8,605
( 5,050)
2,900
$73,505

The taxable benefit on the car would be calculated as follows:

Standby Charge [(2%)(11)($45,200)][11,000 ÷ 18,337]
Operating Cost Benefit - Lesser Of:
• [(11,000)($0.24)] = $2,640
• [(1/2)($5,965)] = $2,983

$5,965

Total Benefit

$8,605

2,640

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 As Mrs. Sorenson has commission income, she has a choice of deducting her expenses under a combination of ITA 8(1)(f), (i), and (j) or, alternatively under a combination of ITA 8(1)(h), (i), and (j). As discussed in the text, she cannot use both
ITA 8(1)(f) and ITA 8(1)(h). Under either case she can deduct $850 for utilities and maintenance under ITA(i) and (j).
Deductions under ITA 8(1)(f) are limited to the amount of commissions earned. With
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207

Solution To AP Ten - 9 respect to home office costs, under ITA 8(1)(f) she could deduct the insurance and property taxes, a total of $2,065 ($725 + $1,340). When this is added to the non-reimbursed travel costs, the total potential deduction under ITA 8(1)(f) would be
$6,265 ($2,065 + $4,200). However, this deduction would be limited to $3,150, the amount of her commission income.
Alternatively, travel costs can be deducted under ITA 8(1)(h). Deductions under this provision are not limited to commission income. If she deducts under ITA 8(1)(h), she cannot deduct the insurance and property taxes, but her $4,200 in non-reimbursed travel costs is fully deductible as it is not limited to commissions. This would be the better choice and would result in deductible employment expenses of $5,050 ($850
+ $4,200).
Note that an employee cannot deduct mortgage interest as a home office cost under any of the ITA 8 provisions.
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:

zle hz Interest Income
Eligible Dividends
Gross Up [(41%)($1,500)]

$3,200
1,500
615

Total Property Income

$5,315

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
Reserve - Lesser Of:
• [($56,000)($100,000 ÷ $143,000)] = $39,162
• [($56,000)(20%)(4 - 0)] = $44,800

Taxable Capital Gain

d

Remaining Gain
Inclusion Rate

$56,000
( 39,162)
$16,838
1/2
$ 8,419

Net Income For Tax Purposes
Mrs. Sorenson’s Net Income For Tax Purposes would be calculated as follows:
Employment Income (See Preceding Calculations)
Property Income
Taxable Capital Gain
RRSP Deduction (Part A)
2011 Net Income For Tax Purposes

$73,505
5,315
8,419
( 11,992)
$75,247

Taxable Income
As Mrs. Sorenson has no deductions applicable to the determination of Taxable Income, her
2011 Taxable Income is equal to her 2011 Net Income For Tax Purposes.

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Solution To AP Ten - 9
Tax Payable
The required calculations here are as follows:
Tax On First $41,544
Tax On Next $33,703 ($75,247 - $41,544) At 22 Percent

$ 6,232
7,415

Tax Before Credits
Tax Credits:
Basic Personal Amount
Spousal ($10,527 - $8,400)
Employment Insurance
Canada Pension Plan
Canada Employment
Cissy’s Education Credits - Lesser Of:
• Actual Credit Amounts
[$7,800 + (8)($400) + (8)($65)] = $11,520
• Maximum = $5,000
Medical Expenses (Note Four)

$13,647
($10,527)
( 2,127)
(
787)
( 2,218)
( 1,065)

( 5,000)
( 10,098)

zle hz Total Credit Base
($31,822)
Rate
15%
Charitable Donations
[15%)($200) + (29%)($600 - $200)]
Dividend Tax Credit On Eligible Dividends [(13/23)($615)]
Federal Tax Payable

(

4,773)

(
(

146)
348)
$ 8,380

Note Four The credit base for medical expenses would be calculated as follows:
Rhonda And Martin’s Expenses ($1,200 + $2,750)
Lesser Of:
• [(3%)($75,247)] = $2,257
• 2011 Threshold Amount = $2,052

$ 3,950

Subtotal
Cissy’s Medical Expenses
Reduced By The Lesser Of:
• $2,052
• [(3%)($6,500)] = $195

$ 1,898

( 2,052)

$8,395

(

195)

Base For Credit

8,200
$10,098

d
Canadian Tax Principles 2011/2012 - Solutions Manual

209

Solution To AP Tax Software Chapter 10

Solution to Problem For Tax Software Chapter 10
This solution includes selected schedules and worksheets from the ProFile T1 return.
Note that the program can only be used to calculate 2010 (not 2011) tax returns and the problem and solution reflect this fact.
The tax return is available on the Instructor’s Resource CD-ROM under the heading
“Tax Software Assignment Problems”. The ProFile version contains the complete return. The .PDF version contains only the schedules required in the problem.
·

To view the .PDF file that contains the required schedules, select the file “PDF
Software Problem Chapter 10” from the PDF Format drop-down list.

·

To view the ProFile file of the complete tax return, select the file “Software
Problem Chapter 10” from the ProFile Format drop-down list.

For more information on how to use the ProFile tax program, please refer to the sample tax returns in the Study Guide.
With the increase in Seymour’s income due to the RRSP withdrawal, he is no longer the lower income spouse. Mary must deduct the $3,100 in child care expenses.

zle hz Although no contributions can be made to a deceased individual's RRSP after the date of death, ITA 146(5.1) permits the deceased individual's legal representative to make contributions to the surviving spouse's RRSP in the year of death or during the first 60 days after the end of that year. Contributions made to a spouse's RRSP can be claimed on the deceased individual's return. However, such payments are subject to limits based on the deceased taxpayer's
Earned Income in the year prior to death, plus any Unused RRSP Deduction Room available from previous years. As a result, even though Seymour has Earned Income in 2010, no RRSP contributions based on that income can be made in 2011.
Seymour’s maximum deductible contribution for 2010 is as follows:
$19,762

RRSP Deduction Limit

$27,862

d

Opening Unused RRSP Deduction Room (Given)
Plus The Lesser Of:
• $22,000 (2010 Maximum)
• [(18%)($45,000)] = $8,100

8,100

Mary ’s maximum deductible contribution for 2011, assuming she does not contribute further to her RRSP in her name for 2010, is as follows:

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Canadian Tax Principles 2011/2012 - Solutions Manual

Solution To AP Tax Software Chapter 10
Unused RRSP Deduction Room At The End Of 2009
Plus The Lesser Of:
• $22,000 (2010 Maximum)
• [(18%)($125,000)] = $22,500

$14,091
22,000

RRSP Deduction Limit For 2010
Contributions Made For 2010

$36,091
( 22,200)

Unused RRSP Deduction Room At The End Of 2010
Plus The Lesser Of:
• $22,450 (2011 Maximum)
• [(18%)($152,866)] = $27,516

$ 13,891
22,450

RRSP Deduction Limit For 2011

$36,341

RRSP Advice
Mary should contribute her maximum for 2011 as soon as possible to take advantage of the tax free compounding inside the RRSP. Even if she does not receive the life insurance benefit before the end of February, she should consider contributing up to $13,891 in order to maximize her RRSP deduction for 2010.

zle hz If she has a self-directed RRSP, she could consider transferring securities she holds outside of her RRSP that have fair market values higher than their adjusted cost base. Her RRSP contribution would be the fair market value of the transferred securities. Although she would be taxed on any capital gains, it would not be until 2011, the year of the transfer.
Mary should not transfer any investments with accrued capital losses as she would not be allowed to deduct the resulting capital losses. However, if she wishes, she could sell them to claim the capital loss against her capital gains and contribute the funds to her RRSP.
Assuming Mary does not contribute further to her RRSP in her name for 2010, she should try to make the maximum deductible RRSP contributions for 2011 of $36,341 as soon as possible.
If she has other funds to invest, she should first consider contributing to William’s RESP and a
TFSA for herself. Whether she should overcontribute up to $2,000 to her RRSP depends on the availability of funds for investment and her after tax yields from investments.
Changes to the Summary form from the previous version, excluding calculated amounts other than Balance Owing (Refund).

Chapter 10
RRSP income

d

Summary Line Changed

RRSP deduction
Child care expenses (all deducted by Mary)

Mary

Canadian Tax Principles 2011/2012 - Solutions Manual

126,000

22,200

27,862

3,100

(1,900)

Tax deducted
Balance Owing (Refund)

Seymour

12,600
(6,878)

34,175

211

Tax Software Assignment Problem - Chapter 10
Walford, Mary-Chap 10P SIN: 527 000 129

Summary

2010 Tax Summary (Federal)
Mary-Chap 10P Seymour-Chap 10P

Total income
Employment *
Old Age Security
CPP/QPP benefits
Other pensions
Split-pension amount
Universal Child Care Benefit
Employment Insurance
Taxable dividends
Interest
Limited partnership
RDSP
Rental
Taxable capital gains
Support payments
RRSP
Other
Self-employment *
Workers' compensation and social assistance

101
113
114
115
116
117
119
120
121
122
125
126
127
128
129
130
135

147
Total income 150
207
208
210
212
213
214
215
217
219
220
221
222
224
229
235
231
Net income 236

118

3,809

(470)
1,607
126,000

215
45,752
160,427

22,200

2011 Estimated
GST/HST credit
Child Tax Benefit
RRSP contribution limit
More than one line is considered

Total payable
27,862 Federal tax
Non-refundable tax credits
Dividend tax credit
Min. tax carry-over/other *

404
350
425
426
Basic federal tax 429

3,100

Non resident surtax
Foreign tax credits / other

405
406
410
414
417
415
418
Net federal tax 420
CPP contributions payable
421
139,282 EI self-employment
430
Social benefits repayment
422
Provincial/territorial tax
428
Total payable 435
Federal tax
2,400 Political/inv. tax credit/other *
1,373 Labour-sponsored tax credit
2,091 Alternative minimum tax
WITB Prepayment (RC210)
Additional tax on RESP

135,127

244
248
249
250
251
254
255
256
Taxable income 260

*

173,008

d

Taxable income
Canadian Forces personnel
Home relocation loan
Security options deductions
Other payments deduction
Losses of other years *
Capital gains deduction
Northern residents
Additional deductions

1,866
1,671

300
301
303
367
306
308
363
364
365
369
313
314
316
318
319
323
332
Subtotal 335
338
Credit at 15%
Donations and gifts
349
Non-refundable tax credits 350

zle hz Net income
RPP
RRSP *
Split-Pension Deduction
Union and professional dues
UCCB repayment
Child care expenses
Disability supports deduction
Business investment loss
Moving expenses
Support payments
Carrying charges and interest
CPP/QPP/PIPP *
Exploration and development
Employment expenses
Social benefits repayment
Other deductions *

152,866

Mary-Chap 10P Seymour-Chap 10P
Non-refundable tax credits
Basic personal amount
Age amount
Spouse / eligible dependant *
Amount for children
Infirm/caregiver *
CPP/QPP/PPIP/EI *
Canada employment amount
Public transit passes amount
Children's fitness amount
Home buyers/Home renovation *
Adoption expenses
Pension income amount
Disability amount
Transfers *
Interest on student loans
Tuition / education
Medical expenses

Total credits
Income tax deducted *
QC or YT abatement *
CPP/EI overpayment *
Medical expense supplement
WITB (Schedule 6)
135,127
139,282 Other credits *
GST/HST rebate
Mary-Chap 10P
Seymour-Chap 10P
Instalments
Provincial tax credits
Total credits

36,341 00

7,718

Balance owing (refund)
Combined balance (refund)

437
440
448
452
453
454
457
476
479
482

10,382

10,382

2,101
2,911
1,051

2,091

3,595
14,344
2,152
2,152

18,169
2,725
480
3,205

29,231
2,152
335

30,436
3,205

26,744

27,231

37
26,707

27,231

26,707

27,231
4,183

15,080
41,787

15,361
46,775

48,665

12,600

48,665

12,600

(6,878)

34,175

27,297

Complete Return Available On Instructor's CD-ROM
212

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Tax Software Assignment Problem - Chapter 10
Gravel, Seymour-Chap 10P (D) SIN: 527 000 079

RRSP deduction

RRSP

RRSP contributions
Description
TD Asset Management

Contributions made to
Own RRSPs
Spousal RRSPs
27,862 00

Contribution period
January to March 1, 2011
March 2 to December 31, 2010
Subtotal

27,862 00

Less: Designated Home Buyers' Plan (HBP) repayment
Designated Lifelong Learning Plan (LLP) repayment
Non-deductible contributions due to HBP or LLP withdrawal
Refund of undeducted contributions included above
Total RRSP contributions

27,862 00

Saskatchewan Pension Plan (SPP) contributions
Own SPP

Spousal SPP

Eligible undeducted contributions from your 2009 return (Please enter here contributions made from Jan 1, 2010 to March 1, 2010 and not deducted on your 2009 return)
Contributions made from March 2, 2010 to December 31, 2010
Contributions made from January 1, 2011 to March 1, 2011
Total SPP Contributions

RRSP deduction limit

zle hz Total SPP contributions
RRSP deduction limit
SPP deduction limit
2,500 00
Own SPP
SPP deduction

Spousal SPP

2,500 00

A
27,862 00 B
5,000 00 C

Option 1: Enter limit from 2009 Notice of (Re)Assessment
Option 2: Calculate the limit

45,000 X 18%

2009 earned income
Lesser of A or $21,000
Less: Pension adjustment from 2009 T4/T4A slips
2010 past service pension adjustment
Plus: 2010 pension adjustment reversal from T10 slip

8,100 A
8,100

Subtotal

Plus: Unused RRSP deduction room from 2009
RRSP deduction limit for 2010

2010 RRSP deduction limit
Eligible income transferred to your RRSP

d

RRSP summary

Subtotal

RRSP contributions to March 1, 2011
RRSP deduction (lesser of lines B and C)

8,100
19,762
27,862

27,862
27,862

27,862 B
27,862 C
27,862 D

RRSP contributions carried forward to 2011 (C - D)
SPP contributions carried forward

213

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Tax Software Assignment Problem - Chapter 10
Walford, Mary-Chap 10P SIN: 527 000 129

RRSP deduction

RRSP

RRSP contributions
Description
TD Asset Management
TD Asset Management

Contributions made to
Own RRSPs
Spousal RRSPs
5,400 00
16,800 00

Contribution period
March 2 to December 31, 2010
January to March 1, 2011
March 2 to December 31, 2010
Subtotal

Less: Designated Home Buyers' Plan (HBP) repayment
Designated Lifelong Learning Plan (LLP) repayment
Non-deductible contributions due to HBP or LLP withdrawal
Refund of undeducted contributions included above
Total RRSP contributions

22,200 00

22,200 00

Saskatchewan Pension Plan (SPP) contributions
Own SPP

Spousal SPP

Eligible undeducted contributions from your 2009 return (Please enter here contributions made from Jan 1, 2010 to March 1, 2010 and not deducted on your 2009 return)
Contributions made from March 2, 2010 to December 31, 2010
Contributions made from January 1, 2011 to March 1, 2011
Total SPP Contributions

RRSP deduction limit

zle hz Total SPP contributions
RRSP deduction limit
SPP deduction limit
2,500 00
Own SPP
SPP deduction

Spousal SPP

A
36,091 00 B
2,500 00 C

Option 1: Enter limit from 2009 Notice of (Re)Assessment
Option 2: Calculate the limit

125,000 X 18%

2009 earned income
Lesser of A or $21,000
Less: Pension adjustment from 2009 T4/T4A slips
2010 past service pension adjustment
Plus: 2010 pension adjustment reversal from T10 slip

22,500 A
22,000

Subtotal

Plus: Unused RRSP deduction room from 2009
RRSP deduction limit for 2010

2010 RRSP deduction limit
Eligible income transferred to your RRSP

d

RRSP summary

Subtotal

RRSP contributions to March 1, 2011
RRSP deduction (lesser of lines B and C)

22,000
14,091
36,091

36,091
36,091

36,091 B
22,200 C
22,200 D

RRSP contributions carried forward to 2011 (C - D)
SPP contributions carried forward

214

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Tax Software Assignment Problem - Chapter 10
Walford, Mary-Chap 10P SIN: 527 000 129

RRSP deduction limit

RRSPLimit

2011 RRSP deduction limit
2010 earned income from line 23 below
Lesser of A or $22,450
Less: 2010 pension adjustment
2011 past service pension adjustment
Plus: 2011 pension adjustment reversal from T10 slip
Subtotal
2010 RRSP deduction limit
Less: 2010 RRSP and SPP deduction
Unused RRSP deduction room
2011 RRSP deduction limit

152,866 x 18%

27,515 A
22,450

22,450
36,091
22,200
13,891

13,891
36,341

Less: RRSP contributions you made but did not deduct on your 2010 return
Additional RRSP contributions you can make and deduct on your 2011 return

36,341

2010 earned income
The line numbers in brackets below refer to the numbers on your 2010 return where you reported your income.

zle hz Employment earnings (lines 101 and 104)
Annual union, professional, or like dues (line 212) that relate to
2
your employment earnings
Employment expenses (line 229) that relate to your employment
+
3 earnings =
Add lines 2 and 3
=
Line 1 minus line 4 (if negative, enter '0')
Net income from a business you carried on alone or as an active partner (lines 135 to 143)
Disability payments you received from the Canada or Quebec Pension Plan (line 152)
Royalties for a work or invention of which you were the author or inventor (line 104)
Net rental income from real property (line 126)
Support payments that you include in income for the year (line 128)
Net research grants you received (line 104)
Employee profit-sharing plan allocation (line 104)
Unemployment benefit plan payments (line 104)
Other income
Add lines 5 to 14

152,866 1

4
152,866

d

Current-year loss from a business you carried on alone or as an active partner (lines 135 to 143)
Amount included at line 6 above that represents the taxable portion of gains on the disposition of eligible capital property Current-year rental loss from real property (line 126)
Support payments that you deduct for the year (line 220)
Other deductions
Add lines 16 to 20
Earned income - Pre-bankruptcy
2010 earned income (line 15 minus line 21 plus line 22)

215

+
+
+
+
+
+
+
+
+
=

152,866 5
6
7
8
9
10
11
12
13
14
152,866 15

+

16

+
+
+
+
=
+
=

17
18
19
20
21
22
152,866 23

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d

zle hz 216

Canadian Tax Principles 2011/2012 - Solutions Manual