Solution to Assignment Problem Four - 4

2004 Solution
The required calculations are as follows:

Additions To Class [(10 Cars)($20,000)] $200,000

One-Half Net Additions [(1/2)($200,000)] ( 100,000)
CCA Base $100,000
CCA [(30%)($100,000)(185/365)] ( 15,205)
One-Half Net Additions 100,000
UCC For January 1, 2005 $184,795

Note that one-half of the net additions for the year is deducted to provide the basis for calculating the 2004 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 June 30, 2004, its operations
were carried out for 185 days in 2004, and only a proportionate share of the annual CCA charge may be taken. We
would call your attention to the fact that it is 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.

2005 Solution
The required calculations are as follows:

Opening Balance For The Class $184,795

Additions [(10 Cars)($21,000)] 210,000
Dispositions - Lesser Of:
• Capital Cost = 3 @ $20,000 = $60,000
• Proceeds Of Disposition = $43,000 ( 43,000)
One-Half Net Additions [(1/2)($210,000 - $43,000)] ( 83,500)
CCA Base $268,295
CCA [(30%)($268,295)] ( 80,489)
One-Half Net Additions 83,500
UCC For January 1, 2006 $271,306

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.

2006 Solution
The required calculations are as follows:

Opening Balance For The Class $271,306

Dispositions - Lesser Of:
• Capital Cost = 4 @ $20,000 = $80,000
• Proceeds Of Disposition = $60,000 ( 60,000)
CCA Base $211,306
CCA [(30%)($211,306)] ( 63,392)
UCC For January 1, 2007 $147,914
The calculations are simplified by the absence of additions to the delivery car fleet. To establish the CCA base, it is
only necessary to deduct the proceeds of the dispositions. The new UCC is the CCA base, less the CCA for the
period.

2007 Solution
The required calculations are as follows:

Opening Balance For The Class $147,914

Dispositions - Lesser Of:
• Capital Cost = 3 @ $20,000
+ 9 @ $21,000 = $249,000
• Proceeds Of Disposition = $168,000 ( 168,000)
Negative Balance ($ 20,086)
Recapture 20,086
UCC For January 1, 2008 Nil

The inability to replace the fleet cars in a timely fashion results in additional income in the amount of $20,086. In a
more realistic situation, it is likely that actions would have been taken to delay the retirement of the older cars and,
thereby, avoid the tax implications of recapture.

2008 Solution
The required calculations are as follows:

Opening Balance For The Class Nil

Acquisitions [(20 Cars)($28,000)] $560,000
One-Half Net Additions [(1/2)($560,000)] ( 280,000)
CCA Base $280,000
CCA [(30%)($280,000)] ( 84,000)
One-Half Net Additions 280,000
UCC For January 1, 2009 $476,000

As was the case in 2004 and 2005, one-half of the net additions must be deducted in establishing the base for CCA
and then added back to determine the opening UCC for the next period.

2009 Solution
The required calculations are as follows:

Opening Balance For The Class $476,000

Dispositions - Lesser Of:
• Capital Cost = 1 @ $21,000
+ 20 @ $28,000 = $581,000
• Proceeds Of Disposition = $348,000 ( 348,000)
Terminal Loss $128,000

At this point, all of the assets in Class 10 have been retired and there is still a $128,000 balance in the UCC. This
results in a terminal loss that will be deducted in full from the other income of Sorrento Pizza. The terminal loss
will also be deducted from the UCC balance leaving a January 1, 2010 balance of nil.
Solution to Assignment Problem Four - 6
Part A
With respect to the goodwill acquired with the Victoria stores, the deductions for cumulative eligible capital for
2007 and 2008 can be calculated as follows:

CEC Balance CEC Deductions

Acquisition [(3/4)($90,000)] $67,500
2007 CEC Amount (7 Percent) ( 4,725) $4,725
Balance January 1, 2008 $62,775
2008 CEC Amount (7 Percent) ( 4,394) 4,394
Balance January 1, 2009 $58,381 $9,119

Part B
The amount to be included in Mr. McLean’s 2009 Net Income For Tax Purposes from the sale of the goodwill
would be calculated as follows:

Opening Balance In Cumulative Eligible Capital $ 58,381

Three-Quarters Of Proceeds [(3/4)($100,000 + $200,000)] ( 225,000)
Balance In Cumulative Eligible Capital ($166,619)

The negative balance in the CEC account after the sale is more than the total of the CEC deductions in the past two
years ($9,119). The $9,119 of previously deducted CEC will have be to added to income in full. The remaining
$157,500 ($166,619 - $9,119) is a three-quarters figure that must be multiplied by two-thirds to reflect the inclusion
rate for capital gains of one-half. The result is $105,000 [(2/3)($157,500)].
Note that this is half of the gain on the disposition of the goodwill [(1/2)($300,000 - $90,000)].
The total income inclusion for 2009 is $114,119 ($9,119 + $105,000).
Solution to Assignment Problem Four - 7
Class 1
As the new building has been allocated to a separate Class 1, two calculations are required here. The CCA on the
existing Class 1 would be as follows:
Opening UCC Balance $590,000
Disposition - Lesser Of:
Proceeds = $290,000 ($440,000 - $150,000)
Capital Cost = $300,000 ($475,000 - $175,000) ( 290,000)
CCA Base $300,000
Rate 4%
Maximum 2009 CCA $ 12,000

The CCA on the new building would be as follows:

Opening UCC Balance Nil

Additions ($500,000 - $125,000) $375,000
One-Half Net Additions ( 187,500)
CCA Base $187,500
Rate 6%
Maximum 2009 CCA $ 11,250

Class 8
The required calculation here would be as follows:
Opening UCC Balance $570,000
Additions 14,000
One-Half Net Additions ( 7,000)
CCA Base $577,000
Rate 20%
Maximum 2009 CCA $115,400

Class 10
The required calculations here would be as follows:
Opening UCC Balance $61,000
Additions 22,000
One-Half Net Additions* Nil
CCA Base $83,000
Rate 30%
Maximum 2009 CCA $24,900

*As the acquired truck was a depreciable property (it had a UCC balance) transferred from a non-arm’s
length person, the half-year rules do not apply to this acquisition. The shareholder’s UCC does not affect
the CCA calculations for Bartel Ltd.
Class 14
The franchise would be allocated to Class 14 and amortized on a straight line basis over its legal life. The maximum
2009 CCA would be $20,000 ($120,000 ÷ 6). Note that the half-year rule is not applicable to Class 14.

Maximum CEC
The maximum deduction from the cumulative eligible capital account is calculated as follows:
Goodwill Purchased [(3/4)($92,000)] $69,000
Unlimited Life Franchise [(3/4)($28,000)] 21,000
2007 Base $90,000
CEC Amount At 7 Percent ( 6,300)
January 1, 2008 Balance $83,700
2008 Disposition [(3/4)($59,000)] ( 44,250)
2008 Base $39,450
CEC Amount At 7 Percent ( 2,762)
January 1, 2009 Balance $36,688
CEC Amount At 7 Percent ( 2,568)
January 1, 2010 Balance (Not Required) $34,120

Summary
The total maximum CCA is $183,550, calculated as follows:

Class 1 $ 12,000
Class 1 11,250
Class 8 115,400
Class 10 24,900
Class 14 20,000
Total CCA $183,550

In addition, there is a CEC amount of $2,568.

Solution to Assignment Problem Five - 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.

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.
Solution to Assignment Problem Five - 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 $485,990
Deductions:
Item 1 - Bad Debt Expense Adjustment (Note 6) ( 4,200)
Item 2 - CCA (Given) ( 123,600)
Net Business Income $358,190

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.

Note 6 For tax purposes, the bad debt adjustment would be calculated as follows:
Last Year’s Reserve $15,000
Actual Write-Offs ( 17,500)
This Year’s Reserve ( 19,200)
Total Deduction For Tax Purposes ($21,700)
Accounting Deduction (Actual Write-Offs) 17,500
Bad Debt Expense Adjustment ($ 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.
Solution to Assignment Problem Five - 7
The minimum net business income of Morton Forms would be calculated as follows::

Accounting Income Before Taxes $193,200

Additions:
Amortization Expense $69,300
Reserve For Inventory Obsolescence 15,000
Cost Of Advertising On A Foreign Television
Station To The Canadian Market (Note 1) 9,600
Unused Advertising Circulars
[(3/4)($12,400)] (Note 2) 9,300
Business Meals And Entertainment -
Non-Deductible 50 Percent 11,000
Charitable Donations (Note 3) 31,900
Appraisal Costs On Land To Be Sold (Note 4) 4,200 150,300
$343,500
Deductions:
Landscaping Costs ($18,900)
CCA ( 94,200) ( 113,100)
Net Business income $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 There are special rules for advertising circulars and similar supplies. These can be found in ITA
10(4)(b) under the rules for inventory.

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.

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.
Solution to Assignment Problem Six - 3
The required net rental income information can be calculated as follows:

Rental Revenues:
18 Prince Street $ 6,000
4 McManus Street 5,000
94 George Street 42,000
125 West Street 10,000 $ 63,000
Expenses:
Property Taxes
($1,200 + $1,550 + $5,200 + $1,750) ($ 9,700)
Interest Charges
($1,750 + $650 + $7,800 + $5,000) ( 15,200)
Other Expenses
($1,000 + $2,500 + $8,500 + $4,000) ( 16,000) ( 40,900)

Terminal Loss On Class 8 Furniture ($8,000 - $5,000) ( 3,000)

Income Before CCA $ 19,100
Maximum CCA On Class 3 And Class 1 Buildings ( 19,100)
Net Rental Income Nil

As two of the Class 3 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 18 Prince Street property. The proceeds to be deducted would be
limited to the original capital cost of $42,000, and this is less than the $50,000 opening UCC of Class 3. There
would, however, be a capital gain on the disposition of $18,000 ($60,000 - $42,000).
Maximum available CCA would be calculated as follows:

18 Prince And 4 McManus [(5%)($50,000 - $42,000)] $ 400

94 George [(5%)($550,000)] 27,500
125 West [(4%)($98,000)] 3,920
Total Available $31,820

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 $19,100. This is less than the maximum available of $31,820,
resulting in a situation in which there are various possibilities with respect to how much of the $19,100 will be
deducted from the buildings in Classes 3 and 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 $3,920 should be taken on the Class 1 building, 125 West Street. As there are two
Class 3 pools, both with a 5 percent rate, it would probably leave more future flexibility if the remaining $15,180
($19,100 - $3,920) was taken from 94 George Street, the pool with the larger UCC.
Note that even though the Class 1 building generated a net rental loss of $750 ($10,000 - $1,750 - $5,000 - $4,000),
CCA can still be taken on the class as there was rental income before CCA when all rental properties were
considered.
Solution to Assignment Problem Seven - 1

Part A
The total cost of the 96 shares remaining on December 31, 2009 would be $2,596. This is calculated in the
following table:

Shares Cost Average

Acquisition Or Sale Date Purchased (Sold) Per Share Total Cost Cost/Share
February, 2005 60 24.00 $ 1,440
November, 2006 90 28.00 2,520
April, 2007 45 30.00 1,350
Subtotal 195 $5,310 $27.23
October, 2007 ( 68) 27.23 ( 1,852)
September, 2009 22 26.00 572
Subtotal 149 $4,030 $27.05
November, 2009 ( 53) 27.05 ( 1,434)
December 31, 2009 Balances 96 $2,596

Part B
The average cost of the shares sold during July, 2009 would be calculated as follows:

April, 2008 Purchase [(200)($24)] $ 4,800

December, 2008 Purchase [(160)($33)] 5,280
Total Cost $10,080

Average Cost ($10,080 ÷ 360) $28.00

Given this average cost, the taxable capital gain on the July, 2009 sale of shares would be calculated as follows:

Proceeds [(260)($36)] $9,360

Cost [(260)($28)] ( 7,280)
Capital Gain $2,080
Inclusion Rate 1/2
Taxable Capital Gain $1,040
Solution to Assignment Problem Seven - 5
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)].

Reserves
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 2009 through 2013. 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 downpayment of $607,500 [(45%)($1,350,000)], the proceeds not yet due are equal to $742,500 ($1,350,000
- $607,500). In 2009 and 2010, 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:
2009 Capital Gain $750,000
2009 Reserve [($750,000)($742,500 ÷ $1,350,000)] ( 412,500)
Capital Gain $337,500
Inclusion Rate 1/2
Taxable Capital Gain For 2009 $168,750

2009 Reserve $412,500

2010 Reserve [($750,000)($675,000 ÷ $1,350,000)] ( 375,000)
Capital Gain $ 37,500
Inclusion Rate 1/2
Taxable Capital Gain For 2010 $ 18,750

For 2011, 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.
 2010 Reserve $375,000
2011 Reserve - Lesser Of:
• [($750,000)($607,500 ÷ $1,350,000)] = $337,500
• [($750,000)(20%)(4 - 2)] = $300,000 ( 300,000)
Capital Gain $ 75,000
Inclusion Rate 1/2
Taxable Capital Gain For 2011 $ 37,500

As of 2012, 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 2012 and 2013 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.
Solution to Assignment Problem Seven - 9
Part A
With respect to Net Income For Tax Purposes, the sale of the Toronto property would have the following tax effects:

Land In the Company’s 2009 tax return a capital gain on the land would be reported as follows:
Proceeds Of Disposition $772,000
Adjusted Cost Base ( 137,000)
Capital Gain - 2009 Tax Return $635,000

If the ITA 44(1) election is used, the amended 2009 capital gain would be $519,000, the lesser of:
• $635,000 (regular capital gain); and
• $519,000 (the excess, if any, of the $772,000 proceeds of disposition for the old land over the $253,000 cost
of the replacement land).
The taxable amount would be $259,500 [(1/2)($519,000)] and this would be included in the revised 2009 Net
Income For Tax Purposes.
If ITA 44(1) is used, the deemed adjusted cost base of the replacement land would be calculated as follows:
Cost $253,000
Capital Gain Deferred By Election ($635,000 - $519,000)( 116,000)
Deemed Adjusted Cost Base Of Replacement Property$137,000

Building As reported in the Company’s 2009 tax return, the capital gain and recapture on the building would be
as follows:
Proceeds Of Disposition $989,000
Adjusted Cost Base ( 605,000)
Capital Gain - 2009 Tax Return $384,000

Capital Cost $605,000

UCC ( 342,000)
Recapture - 2009 Tax Return $263,000

If the ITA 44(1) election is used, the amended 2009 capital gain would be nil, the lesser of:
• $384,000 (regular capital gain); and
• Nil (reflecting the fact that there was no excess of the $989,000 proceeds of disposition for the old building
over the $1,042,000 cost of the replacement building).
If the ITA 13(4) election is used, the amended 2009 recapture would be calculated as follows:
 January 1, 2009 UCC Balance $342,000
Deduction:
Lesser Of:
• Proceeds Of Disposition = $989,000
• Capital Cost = $605,000 $605,000
Reduced By The Lesser Of:
• Normal Recapture = $263,000
• Replacement Cost = $1,042,000 ( 263,000) ( 342,000)
Recapture Of 2009 CCA (Amended) Nil

If both elections are used, the UCC of the replacement building is calculated as follows:
Cost $1,042,000
Capital Gain Deferred By Election ( 384,000)
Deemed Capital Cost $ 658,000
Recapture Deferred By Election ( 263,000)
UCC - Replacement Property $ 395,000

Note that the UCC for the new building is equal to the UCC of the old building ($342,000), plus the additional
$53,000 ($1,042,000 - $989,000) in funds required for its acquisition.

Equipment As this is a voluntary disposition, the equipment does not qualify as “former business property”
and, as a consequence, neither the ITA 44(1) nor the ITA 13(4) election can be used. However, as there were
no other assets in the class at the end of 2009, there will be a terminal loss of $13,000 ($127,000 - $114,000).
The new equipment has a capital cost equal to its actual cost of $205,000. This is also equal to the UCC.

Part B
As calculated in Part A, there was a $519,000 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 $53,000 difference between the $989,000 fair market value of the old building and the $1,042,000 cost of the
replacement building. This would reduce the capital gain on the land by $53,000. The adjusted cost base of the
replacement land would remain at $137,000. This would still leave the capital gain on the building at nil. This can
be shown as follows:
Deemed Proceeds Of Disposition ($989,000 + $53,000)$1,042,000
Less: Cost Of Replacement Property 1,042,000
Capital Gain Nil

Using this election, Net Income For Tax Purposes would be reduced by $26,500 [(1/2)($53,000)]. 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 2009 Net Income For
Tax Purposes by one-half of the $53,000 capital gain, it has forgone future CCA for the full amount of $53,000.
With the use of this election, the deemed cost of the new building would be $605,000 [$1,042,000 - ($989,000 +
$53,000 - $605,000)] and the UCC would be reduced to $342,000 ($605,000 - $263,000).
Solution to Assignment Problem Seven - 11
Mr. Lange’s taxable gain on deemed dispositions resulting from his departure from Canada would be calculated as
follows:

Vacant land N/A

Automobile N/A
Coin Collection ($11,000 - $5,000) $ 6,000
Inco Ltd. Shares ($38,000 - $24,000) 14,000
Alcan Shares ($35,000 - $42,000) ( 7,000)
Royal Bank Shares ($23,000 - $15,000) 8,000
Nal Enterprises Ltd. Shares ($153,000 - $26,000) 127,000
Capital Gain $148,000
Inclusion Rate 1/2
Taxable Capital Gain On Departure $ 74,000

The vacant land is exempt from the deemed disposition rules that are applicable to individuals leaving Canada.
However, as it is taxable Canadian property, a later sale of this land will attract Canadian income taxes, even though
Mr. Lange is no longer a Canadian resident.
The loss on the automobile is not deductible as the vehicle is a personal use property.
Solution to Assignment Problem Seven - 13
During the period 1993 through 2009 (17 years), the cottage experienced the larger capital gain as shown in the
following table. To minimize the total capital gain, it should be designated the principal residence for 16 years.
This will completely eliminate the capital gain as the exemption formula adds an additional year.
This will leave one year for the city home to be designated his principal residence.
The total capital gain to be recognized would be as follows:

City Home Cottage

Proceeds Of Disposition $528,000 $330,000
Adjusted Cost Base ( 264,000) ( 36,000)
Real Estate Commissions ( 32,000) ( 16,000)
Total Gain $232,000 $278,000
Exemption:
City Home [$232,000][(1 + 1) ÷ 17] ( 27,294)
Cottage [$278,000][(16 + 1) ÷17] ( 278,000)
Capital Gain $204,706 Nil

This gives a total capital gain of $204,706 on the two properties and a taxable capital gain of $102,353 [(1/2)
($204,706)].
Solution to Assignment Problem Seven - 14

Personal Use Property

The automobile, boat, and antique clock would be classified as personal use property. As a consequence, the loss on
the boat cannot be recognized. However, capital gains on the other items would be taxable and are calculated,
taking into consideration the $1,000 floor rule, as follows:
Auto Clock
Proceeds Of Disposition $27,000 $1,700
Adjusted Cost Base ($1,000 Floor) ( 25,000) ( 1,000)
Selling Costs ( 150) ( 50)
Capital Gain $ 1,850 $ 650
Inclusion Rate 1/2 1/2
Taxable Capital Gain $ 925 $ 325

As losses on personal use property are not deductible under any circumstances, no consideration is given to the sale
of the boat.

Listed Personal Property

The coin collection, rare manuscript, and painting would be classified as listed personal property. If a loss occurs on
property in this category, it can be deducted against capital gains on property in this category. Given this, the
relevant calculations are as follows:
Coins Manuscript Painting
Proceeds Of Disposition ($1,000 Floor) $1,300 $1,000 $1,100
Adjusted Cost Base ($1,000 Floor) ( 1,600) ( 1,700) ( 1,000)
Selling Costs ( 50) ( 30) ( 50)
Capital Gain (Loss) ($ 350) ($ 730) $ 50
Inclusion Rate 1/2 1/2 1/2
Taxable Capital Gain (Allowable Loss) ($ 175) ($ 365) $ 25

The total net taxable capital gain to be recognized for the current year is as follows:

Personal Use Property ($925 + $325) $1,250

Listed Personal Property ($25 - $25) Nil
Net Taxable Capital Gain $1,250

As the losses on listed personal property can only be recognized to the extent of the $25 gain on such property, a
loss carry over of $515 ($175 + $365 - $25) will be available to reduce gains on listed personal property in other
years.
Solution to Assignment Problem Eight - 3
The allowable moving expenses can be calculated as follows:

Expenses Of First Trip After Acquiring New Residence

Hotel (3 Days At $90) $270
Food (3 Days At $30) 90 $ 360
Selling Costs Of Old Residence ($9,000 + $1,500) 10,500
Acquisition Cost Of New Residence ($1,750 + $1,100) 2,850
Expenses Of Travel To Ottawa
Gas $ 415
Hotel (16 Days At $75) 1,200
Food (16 Days AT $60) 960 2,575
Moving Company Fees 4,500
Total Allowable Expenses $20,785
Employment Income In New Location ( 8,000)
Carry Forward $12,785

Notes:
1. With respect to the first trip, only the food and lodging costs that occurred after the acquisition of the new
residence would be allowed. Neither the airfare nor the car rental costs are deductible by Mr. Tully.

2. The taxes on the old home to the date of sale would not be allowed.

3. The limit of 15 days expenses for meals and lodging near the old or new homes would not be exceeded in this
situation. More explicitly, there were 3 days on the first trip and only 10 days after arriving in Ottawa. The
remaining 6 days are travel costs and do not count toward the 15 day limit.

4. The storage costs are deductible.

5. The fact that Mr. Tully started work for the new employer fairly late in the current year acts to limit the amount
that he can deduct. However, the unused balance of $12,785 can be carried forward.
Solution to Assignment Problem Nine - 1
Part A
Mr. Sparks’ Net Income For Tax Purposes would be calculated as follows:
Income Under ITA 3(a):
Net Employment Income $60,000
Income From Property 6,000 $66,000
Income Under ITA 3(b):
Taxable Capital Gains $7,500
Allowable Capital Losses (Maximum) ( 7,500) Nil
Balance From ITA 3(a) And (b) $66,000
Subdivision e Deductions ( 3,000)
Balance From ITA 3(c) $63,000
Deductions Under ITA 3(d):
Business Loss ( 16,000)
Net Income For Tax Purposes $47,000

Mr. Sparks’ Net Income For Tax Purposes is $47,000 and he has a net capital loss carry over of $3,000 ($7,500 -
$10,500).

Part B - Case 1

Mr. Sparks 2008 Earned Income would be calculated as follows:

Net Employment Income $60,000
Add Back RPP Contributions 1,000
Business Loss ( 16,000)
Earned Income $45,000

Given this, his maximum deductible RRSP contribution would be calculated as follows:
Unused Deduction Room - End of 2008 Nil
Increase In RRSP Deduction Limit:
Lesser of:
• 2009 RRSP dollar limit = $21,000
• 18% of 2008 Earned Income of $45,000 = $8,100 $8,100
Less 2008 PA ($1,000 + $1,500) ( 2,500)
Maximum Deductible RRSP Contribution $5,600
Part B - Case 2

Mr. Sparks 2008 Earned Income would be calculated as follows:

Net Employment Income $60,000
Business Loss ( 16,000)
Earned Income $44,000

Given this, his maximum deductible RRSP contribution would be calculated as follows:
Unused Deduction Room - End of 2008 Nil
Increase In RRSP Deduction Limit:
Lesser of:
• 2009 RRSP dollar limit = $21,000
• 18% of 2008 Earned Income of $44,000 = $7,920 $7,920
Less 2008 PA ( 1,500)
Maximum Deductible RRSP Contribution $6,420

Part B - Case 3

Mr. Sparks 2008 Earned Income would be calculated as follows:

Net Employment Income $ 60,000
Business Loss ( 16,000)
Net Rental Income 140,000
Earned Income $184,000

Given this, his maximum deductible RRSP contribution would be calculated as follows:
Unused Deduction Room - End of 2008 Nil
Increase In RRSP Deduction Limit:
Lesser of:
• 2009 RRSP dollar limit = $21,000
• 18% of 2008 Earned Income of $184,000 = $33,120 $21,000
Less 2008 PA Nil
2009 RRSP Deduction Limit $21,000
Less 2009 Contribution to Spousal RRSP ( 1,500)
Maximum Deductible RRSP Contribution $19,500
Solution to Assignment Problem Nine - 2
Part A
Donald’s maximum 2009 RRSP deduction will include the lesser of $21,000 and 18 percent of his 2008 Earned
Income. This latter figure is calculated as follows:

Gross Salary $40,000

Commissions 20,000
Employment Expenses ( 3,000)
Taxable Benefit On Loan 2,750
Net Rental Loss ( 2,500)
Spousal Support Received 2,400
Spousal Support Paid ( 3,500)
Royalties (Note) Nil
Earned Income $56,150
Percent 18%
Annual Addition (Less Than $21,000) $10,107

Note Royalties received due to someone else’s work are not part of Earned Income for RRSP purposes.

Donald’s maximum 2009 RRSP deduction is calculated as follows:

Opening Unused RRSP Deduction Room $25,000

Annual Addition 10,107
2008 Pension Adjustment [(2)($1,400)] ( 2,800)
RRSP Deduction Limit For 2009 $32,307

The Pension Adjustment is equal to the sum of the employee and employer contributions to his RPP.

Part B
The appropriate advice at the end of 2009 would be to contribute enough to make the maximum 2009 deduction,
plus the allowed overcontribution of $2,000. This amount would be calculated as follows:

RRSP Deduction Limit For 2009 $32,307

Non-Penalty Excess 2,000
Undeducted 2001 Contribution ( 7,500)
Maximum Non-Penalty Contribution For 2009 $26,807

Contributions in excess of this amount would, if made prior to the end of 2009, attract a penalty of 1 percent per
month.
Solution to Assignment Problem Nine - 5
The excess RRSP contributions amount at the end of each month of 2009 would be calculated as follows:
March To
January February November December
Undeducted Contributions
At Beginning Of Month $54,000 $54,000 $59,000 $59,000
Add: 2009 Contribution 5,000
Deduct: 2009 Withdrawal ( 35,000)
Undeducted Contributions
At End Of Month $54,000 $59,000 $59,000 $24,000
Deduct: Unused Deduction
Room Carried Forward ( 10,000) ( 10,000) ( 10,000) ( 10,000)
Deduct: 2009 Increase In
Unused Deduction Room ( 9,000) ( 9,000) ( 9,000) ( 9,000)
Deduct: $2,000 Cushion ( 2,000) ( 2,000) ( 2,000) ( 2,000)
Monthly Cumulative Excess $33,000 $38,000 $38,000 $ 3,000

Penalty At 1 Percent Per Month $ 330 $ 380 $ 380 $ 30

The total penalty for 2009 is $4,160 [($330)(1) + ($380)(10) + ($30)(1)].

Solution to Assignment Problem Nine - 6

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 2009, 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.
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. In addition, he could make a non-deductible contribution of up to $2,000 without being
assessed any penalty.
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.
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 withdrawn in the form of an annuity, the payments will be eligible for the pension
income tax credit after Mr. White reaches age 65. The annuity payments will also be eligible for the pension income
splitting provisions (see Chapter 8).
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 2009 will be the same,
whether or not he transfers part of the retiring allowance into his plan.
Solution to Assignment Problem Ten - 2
2006 Analysis
The required information can be calculated as follows:
ITA 3(a)
Business Income $18,000
Taxable (Grossed Up) Dividends 2,360 $20,360
ITA 3(b)
Taxable Capital Gains [(1/2)($1,200)] $ 600
Allowable Capital Losses [(1/2)($4,200)] ( 2,100) Nil
ITA 3(c) $20,360
ITA 3(d)
Farm Loss (See Note) ( 6,250)
Net Income For Tax Purposes And Taxable Income $14,110

Note Ms. Breau’s farm losses are restricted as follows:

Total Farm Loss $10,000
Deductible Amount:
First $2,500 ($2,500)
One-Half Of $7,500 ($10,000 - $2,500) ( 3,750) ( 6,250)
Restricted Farm Loss Carry Forward $3,750

As noted in the problem, none of the losses can be carried back before 2006. This would leave the following carry
forward balances at the end of 2006:
• Restricted Farm Loss Carry Forward $3,750
• Net Capital Loss Carry Forward [(1/2)($4,200 - $1,200)] $1,500

2007 Analysis
The required information can be calculated as follows:
ITA 3(a)
Farm Income $ 2,000
Taxable (Grossed Up) Dividends 2,950 $ 4,950
ITA 3(b)
Taxable Capital Gains [(1/2)($2,000)] $ 1,000
Allowable Capital Losses Nil 1,000
ITA 3(c) $ 5,950
ITA 3(d)
Business Loss ( 14,000)
Net Income For Tax Purposes Nil
2006 Net Capital Loss Carry Forward ($ 1,000)
Taxable Income (Loss) Nil

Since there are taxable capital gains this year, and the problem states that Ms. Breau would like to deduct the
maximum amount of her net capital loss carry forwards, the net capital loss carry forward of $1,000 is added to the
balance of the non-capital loss.
The non-capital loss carry over is calculated as follows:

Business Loss $14,000

2006 Net Capital Loss Deducted 1,000
ITA 3(c) Income ( 5,950)
Non-Capital Loss Carry Over For 2007 $ 9,050

The entire non-capital loss carry over could be carried back to 2006, but since Ms. Breau requires $14,000 in
Taxable Income to fully utilize her tax credits, the maximum carry back to 2006 is $110, calculated as follows:
2006 Taxable Income (As Reported) $14,110
Non-Capital Loss Carry Back From 2007 ( 110)
2006 Amended Taxable Income (Minimum) $14,000

This carry back leaves Ms. Breau with her required $14,000 in Taxable Income. There would be the following carry
forward balances at the end of 2007:
• Restricted Farm Loss Carry Forward (Unchanged) $3,750
• Net Capital Loss Carry Forward ($1,500 - $1,000)] $ 500
• Non-Capital Loss Carry Forward ($9,050 - $110) $8,940

2008 Analysis
The required information can be calculated as follows:
ITA 3(a)
Business Income $30,000
Farm Income 3,150
Taxable (Grossed Up) Dividends 3,963 $37,113
ITA 3(b)
Taxable Capital Gains [(1/2)($4,000)] $2,000
Allowable Capital Losses Nil 2,000
Net Income For Tax Purposes $39,113
Restricted Farm Loss Carry Forward (Equal To Farm Income) ( 3,150)
Net Capital Loss Carry Forward (Less Than $2,000) ( 500)
Non-Capital Loss Carry Forward (All) ( 8,940)
Taxable Income $26,523

There would be the following carry forward balance at the end of 2008:
• Restricted Farm Loss Carry Forward ($3,750 - $3,150) $ 600
2009 Analysis
The required information can be calculated as follows:
ITA 3(a)
Taxable (Grossed Up) Dividends $ 6,450
ITA 3(b)
Taxable Capital Gains [(1/2)($4,500)] $ 2,250
Allowable Capital Losses [(1/2)($14,500)] ( 7,250) Nil
ITA 3(c) $ 6,450
ITA 3(d)
Business Loss ($19,000)
Farm Loss ( 2,000) ( 21,000)
Net Income For Tax Purposes And Taxable Income Nil

The available non-capital loss can be calculated as follows:

Business Loss $19,000
ITA 3(c) Income ( 6,450)
Non-Capital Loss Carry Over $12,550
Farm Loss (Unrestricted) 2,000
Total Loss Carry Over For 2009 $14,550

Although technically, the farm loss is accounted for separately from the non-capital loss, since the farm loss is less
than $2,500 it is treated as an unrestricted farm loss and can be applied against all types of income. Given the carry
over rules are the same, we have treated this farm loss as part of the non-capital loss carry over. The preceding loss
carry over of $14,550 is available for carry back to 2008.
With respect to the allowable capital loss of $5,000 [(1/2)($10,000)], there are $1,500 ($2,000 - $500) in taxable
capital gains left in 2008 as the basis for a carry back. This means that $1,500 of this year’s allowable capital loss
can be carried back, leaving $3,500 ($5,000 - $1,500) to be carried forward as a net capital loss balance.
If both the $14,550 non-capital loss and the $1,500 net capital loss were carried back to 2008, the result would be a
Taxable Income of $10,473, less than the $14,000 that is required to fully utilize Ms. Breau’s available tax credits.
As the net capital loss can only be deducted to the extent of taxable capital gains, it would be advisable to claim the
full amount of this loss carry back. Based on this view, the non-capital loss deduction will be limited to $11,023, an
amount that will provide for full use of Ms. Breau’s 2008 tax credits:

2008 Taxable Income (As Reported) $26,523

Non-Capital Loss Carry Back From 2009 ( 11,023)
Net Capital Loss Carry Back From 2009 ( 1,500)
2008 Amended Taxable Income $14,000

These carry backs leave Ms. Breau with her required $14,000 in Taxable Income. There would be the following
carry forward balances at the end of 2009:
• Restricted Farm Loss Carry Forward (Unchanged) $ 600
• Net Capital Loss Carry Forward ($5,000 - $1,500)] $3,500
• Non-Capital Loss Carry Forward (Nil + $14,550 - $11,023) $3,527
Solution to Assignment Problem Ten - 7
Net Income For Tax Purposes And Taxable Income
Ms. Klaus’ minimum Net Income For Tax Purposes and Taxable Income would be calculated as follows:
Net Employment Income
Gross Salary - Ottawa $62,000
RPP Contributions - Ottawa ( 2,500)
Stock Option Benefit (Note One) 10,000
Gross Salary - Toronto 13,000
RPP Contributions - Toronto ( 650)
Moving Allowance (Note Two) 7,500 $ 89,350
Business And Property Income
Non-Eligible Dividends On Lintz Shares $ 7,500
Gross Up [(25%)($7,500)] 1,875
Mail Order Business (Note Three) 22,500 31,875
Taxable Capital Gains (Allowable Capital Losses)
Lintz Shares [(1/2)($105,000 - $95,000 - $1,050)] $ 4,475
Employer’s Shares (Note Four) ( 175) 4,300
Other Sources Of Income (Subdivision d)
Child Support (Note Five) $ -0-
Retiring Allowance (Note Six) 30,000 30,000
Other Deductions From Income (Subdivision e)
Moving Expenses (Note Two) ($ 5,160)
Child Care Costs (Note Seven) ( 7,560)
RRSP Contributions (Note Eight) ( 36,498) ( 49,218)
Net Income For Tax Purposes $106,307
Stock Option Deduction (Note One) ( 5,000)
Taxable Income $101,307

Note One As Ms. Klaus immediately sold the shares, there was no possibility of deferring the employment
income inclusion. The required inclusion would be calculated as follows:
Fair Market Value At Exercise [($20)(2,000 Shares)] $40,000
Cost Of Shares [($15)(2,000 Shares)] ( 30,000)
Stock Option Benefit $10,000

As the option price at the time the options were issued was greater than the fair market value of the shares at
that time, Ms. Klaus is entitled to a deduction under ITA 110(1)(d), equal to one-half of the $10,000
employment income benefit.

Note Two All allowances received from an employer, except for those that are specifically exempted, must be
included in employment income. As there is no exemption for a moving expense allowance, the $7,500
received by Ms. Klaus must be added to income. However, she can then deduct the following moving expenses
in the calculation of Net Income For Tax Purposes:
Moving Company Charges $3,800
Airfare For Toronto Trip (Not Deductible) Nil
Meals And Lodging On Toronto Trip (Not Deductible) Nil
Gas For October 31 Move To Toronto 65
Lodging In Ottawa On October 30 110
Meals On October 30 And October 31 250
Lease Cancellation Charges 935
Legal Fees On Acquisition Of Toronto Home (Not Deductible) Nil
Total $5,160

You should note that this situation should have been structured differently. By giving an allowance not based
on actual expenses, the employer placed Ms. Klaus in the position of having to list her expenses. As a
consequence, she was limited to those deductions specified in ITA 62(3). The result is a net inclusion in
income of $2,340 ($7,500 - $5,160). As an alternative, the employer could have reimbursed her for all of the
expenses listed in the problem, without creating a taxable benefit for Ms. Klaus. This would have cost the
employer less than $7,500 and, in addition, Ms. Klaus would have avoided the additional taxes on the $2,340.
The legal fees on the new home are not deductible because she did own a home in the old location.

Note Three The interest on the demand loan is deductible and does not require adjustment. The $27,000
withdrawal would have no effect on business income.

Note Four For shares acquired through the exercise of stock options, the adjusted cost base is the fair
market value of the shares at the time of exercise. As a consequence, the allowable capital loss arising on
the disposition of the employer’s shares would be calculated as follows:
Proceeds Of Disposition [($20)(2,000 Shares)] $40,000
Less:
Adjusted Cost Base [($20)(2,000)] ($40,000)
Selling Costs ( 350) ( 40,350)
Capital Gain (Loss) ($ 350)
Inclusion Rate 1/2
Taxable Capital Gain (Allowable Capital Loss) ($ 175)

Note Five Ms. Klaus cannot deduct the $2,500 in legal fees paid in connection with her separation
agreement. However, as her husband will not be able to deduct the $25,000 lump sum payment, it does not
have to be included in her income. The $48,000 [($4,000)(12 Months)] in child support will not be
deductible to her husband and will be excluded from her Net Income For Tax Purposes.

Note Six All of the retiring allowance must be included in income under ITA 56(1)(a)(ii). Subject to a
limit of $2,000 per year of service prior to 1996, amounts transferred to an RRSP can be deducted under
ITA 60(j.1). Ms. Klaus had 20 years of service prior to 1996. As a result, her maximum transfer would be
$40,000 [(20)($2,000)]. Given this, she can transfer to her RRSP, and deduct, the entire $30,000 retiring
allowance.

Note Seven The deductible child care costs of $7,560 would be the least of:
Actual Child Care Expense Plus Deductible Camp Fees
[$7,160 + ($100 Limit)(4 Weeks)] $ 7,560
Annual Limit ($10,000 For Louise + $4,000 For Martin) 14,000
Two-Thirds Of Earned Income
[(2/3)($89,350 + $2,500 + $650 + $22,500)] 76,667
 Note Eight Ms. Klaus’ maximum deductible RRSP contribution of $36,498, which includes her retiring
allowance, is calculated as follows:
Unused Deduction Room - End Of 2008 Nil
Lesser Of:
• 2009 RRSP Dollar Limit = $21,000
• 18% Of 2008 Earned Income Of $61,100 = $10,998 $10,998
Less 2008 PA ( 4,500)
2009 RRSP Deduction Limit $ 6,498
Retiring Allowance 30,000
Maximum Deductible RRSP Contribution For 2009 $36,498

Tax Payable
The Tax Payable would be calculated as follows:
Tax on First $81,452 $15,069
Tax on Next $19,855 ($101,307- $81,452) At 26 Percent 5,162
Total Before Credits $20,231
Basic Personal Amount ($10,320)
Amount For An Eligible Dependant - Martin ( 10,320)
Child ( 2,089)
Caregiver - Louise (Income $14,336) ( 4,198)
CPP (Maximum) ( 2,119)
EI (Maximum) ( 732)
Canada Employment ( 1,044)
Transfer Of Louise’s Disability ( 7,196)
Medical Expenses (Note Nine) ( 15,659)
Credit Base ($53,677)
Rate 15% ( 8,052)
Non-Eligible Dividend Tax Credit [(2/3)($1,875)] ( 1,250)
Charitable Donations
[(15%)($200) + (29%)($1,500 - $200)] ( 407)
Political Contributions Tax Credit (Note Ten) ( 525)
Net Federal Tax $ 9,997
CPP Overpayment ($2,119 + $500 - $2,119) ( 500)
EI Overpayment ($732 + $390 - $732) ( 390)
Amount Owing To The CRA $ 9,107

Note Nine
Marcia And Martin’s Medical Expenses ($9,700 + $900)$10,600
Threshold - Lesser Of: [(3%)($106,307)] and $2,011 ( 2,011)
Subtotal $ 8,589
Louise’s Medical Expense - Lesser Of:
• $7,250 - (3%)($6,000) = $7,070
• Absolute Limit = $10,000 7,070
Allowable Medical Expenses $15,659

Note Ten The political contributions tax credit is $525 [(3/4)($400) + (1/2)($350) + (1/3)($150)].
Solution to Assignment Problem Three - 1
The amount of the personal tax credits would be as follows:

1. Ms. Smith will qualify for the following credits:

Basic Personal Amount $10,320
Spousal ($10,320 - $3,750) 6,570
Total Credit Base $16,890
Rate 15%
Total Credits $ 2,534

There is no tax credit available for her son.

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

Basic Personal Amount $10,320
Spousal 10,320
Age 6,408
Pension 2,000
Spouse’s Disability 7,196
Total Credit Base $36,244
Rate 15%
Total Credits $ 5,437

As Ms. Finkly’s Net Income For Tax Purposes is less than $32,312, there will be no reduction in her age
credit.

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

Basic Personal Amount $10,320
Spousal 10,320
Child (13 Year Old And 15 Year Old) [(2)($2,089)] 4,178
Caregiver (20 Year Old Disabled Child) 4,198
Total Credit Base $29,016
Rate 15%
Total Credits $ 4,352

4. Mr. Renaud will qualify for the following credits:

Basic Personal Amount $10,320
Eligible Dependant (Any Child) 10,320
Child [(3)($2,089)] 6,267
Total Credit Base $26,907
Rate 15%
Total Credits $ 4,036
5. Ms. Hill will qualify for the following credits:
Basic Personal Amount $10,320
EI (Maximum) 732
CPP (Maximum) 2,119
Canada Employment 1,044
Total Credit Base $14,215
Rate 15%
Total Credits $ 2,132

Her husband’s income will have to be considered for the entire year and, with him having a total of $36,000
($33,000 + $3,000), the spousal credit will be eliminated.

6. Mr. Rajit will qualify for the following credits:

Basic Personal Amount $10,320
Eligible Dependant (Son) 10,320
Child (Son) 2,089
Caregiver (Mother) [$4,198 - ($16,500 - $14,336)] 2,034
Total Credit Base $24,763
Rate 15%
Total Credits $ 3,714
Solution to Assignment Problem Three - 2
Case A The solution to this Case can be completed as follows:

Tax [$6,109 + (22%)($51,000 - $40,726)] $8,369

Basic Personal Amount ($10,320)
Spousal ($10,320 - $8,800) ( 1,520)
EI ( 732)
CPP ( 2,119)
Canada Employment ( 1,044)
Caregiver [$4,198 - ($16,000 - $14,336)] ( 2,534)
Credit Base ($18,269)
Rate 15% ( 2,740)
Federal Tax Payable $5,629

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 [$6,109 + (22%)($51,000 - $40,726)] $8,369

Basic Personal Amount ($10,320)
Spousal ($10,320 - $4,410) ( 5,910)
Child ( 2,089)
EI ( 732)
CPP ( 2,119)
Canada Employment ( 1,044)
Medical Expenses [$3,150 - (3%)($51,000)] ( 1,620)
Credit Base ($23,834)
Rate 15% ( 3,575)
Federal Tax Payable $ 4,794

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

Tax [$6,109 + (22%)($51,000 - $40,726)] $8,369

Basic Personal Amount ($10,320)
Spousal ($10,320 - $4,500) ( 5,820)
EI ( 732)
CPP ( 2,119)
Canada Employment ( 1,044)
Transfer From Son (Note) ( 5,000)
Credit Base ($25,035)
Rate 15% ( 3,755)
Federal Tax Payable $4,614
Note: The transfer from the son is as follows:
Tuition Fees $4,000
Base For Education Credit [(8 Months)($400)] 3,200
Base For Textbook Credit [(8 Months)($65)] 520
Total Amount Available $7,720
Maximum Transfer ( 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 [$6,109 + (22%)($51,000 - $40,726)] $8,369
Basic Personal Amount ($10,320)
EI ( 732)
CPP ( 2,119)
Canada Employment ( 1,044)
Credit Base ($14,215)
Rate 15% ( 2,132)
Political Contributions Tax Credit
[(3/4)($400) + (1/2)($350) + (1/3)($250)] ( 558)
Subtotal $5,679
Charitable Donations [(15%)($200) + (29%)($15,000 - $200)] ( 4,322)
Federal Tax Payable $ 1,357

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.
This leaves Mr. Norris with $35,000 ($50,000 - $15,000) in charitable donations that can be carried forward for
five years until 2014. 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 [$6,109 + (22%)($51,000 - $40,726)] $8,369

Basic Personal Amount ($10,320)
Eligible Dependant ( 10,320)
Child - Mary ( 2,089)
EI ( 732)
CPP ( 2,119)
Canada Employment ( 1,044)
Interest On Student Loan ( 450)
Credit Base ($27,074)
Rate 15% ( 4,061)
Federal Tax Payable $4,308
Solution to Assignment Problem Three - 3
Mr. Lane’s federal tax payable (refund) would be calculated as follows:

Net Income For Tax Purposes And Taxable Income $70,000

Tax On First $40,726 $ 6,109

Tax On Next $29,274 At 22 Percent 6,440
Federal Tax Before Credits $12,549
Basic Personal Amount ($10,320)
Eligible Dependant (Note 1) ( 10,320)
Child [(3)($2,089)] ( 6,267)
EI ( 732)
CPP (maximum) ( 2,119)
Canada Employment ( 1,044)
Public Transit Passes [(11)(2)($75)] 1,650
Child Fitness [(2)($425)] ( 850)
Medical Expenses (Note 2) ( 2,389)
Credit Base ($35,691)
Rate 15% ( 5,354)
Federal Political Tax Credit [(3/4)($400) + (1/2)($50)] ( 325)
Federal Tax Payable $ 6,870
CPP Overpayment ($2,154 - $2,119) ( 35)
Federal Tax Withheld ( 10,100)
Federal Tax Payable (Refund) ($ 3,265)

Note 1 The eligible dependant amount can be claimed for either his 10 or 12 year old child. His 15 year old
son would not be selected as he has Net Income For Tax Purposes of $8,200.

Note 2 Allowable medical expenses are as follows:

Minor Child’s Medical Expenses $4,400
Lesser Of:
• [(3%)($70,000)] = $2,100
• 2009 Threshold Amount = $2,011 ( 2,011)
Allowable Medical Expenses $2,389

Since his 15 year old son is under 18 years of age, his allowable medical expenses are not affected by his Net
Income For Tax Purposes. If he was 18 or older, they would be.
Solution to Assignment Problem Twenty-One - 5
Mrs. Archer’s input tax credits would be calculated as follows:

Meals With Clients [(13%)(50%)($1,600)] $ 104

Country Club Membership Nil
Laptop [(13%)($2,500)] 325
Automobile [(13%)($30,000)] 3,900
Total Of Input Tax Credits $4,329

The deductibility of certain types of business costs are restricted for income tax purposes. For many of these items,
there is a corresponding restriction on the ability of the business to claim input tax credits for HST purposes. In this
problem the applicable restrictions are as follows:

• The recovery of HST on meals and entertainment expenses is limited to 50 percent.

• No input tax credit is allowed for HST paid on membership fees or dues in any club whose main purpose is to
provide dining, recreational, or sporting facilities.
• No input tax credits are available for HST paid on the portion of the cost or lease payment of a passenger
vehicle that is in excess of the deduction limits ($30,000 cost).

As a further note, since the laptop is used more than 50 percent for commercial activity, 100 percent of the input tax
credit can be claimed. The fact that it was invoiced in December means that the input tax credit can be claimed
despite the fact it was not paid for until the following quarter.
Solution to Assignment Problem Twenty-One - 6
The sales are fully taxable. GST paid on the cost of balloons purchased and Operating Costs can be claimed as an
input tax credit. All other items are GST exempt. The net GST remittance for the month is calculated as follows:

GST On Sales [(5%)($69,000)] $3,450

Input Tax Credits:
Balloons Purchased [(5%)($12,000 - $3,000 + $4,000)] ( 650)
Operating Costs [(5%)($14,500)] ( 725)
Net GST Remittance For The Month $2,075
Solution to Assignment Problem Twenty-One - 7
The GST refund for Norton’s Variety for the current period would be calculated as follows:

GST Collected [(5%)($250,000)] $12,500

Input Tax Credits:
Purchases:
Fully Taxable Goods [(5%)($175,000 + $10,000) ] ( 9,250)
Zero-Rated Goods Nil
Amortization Expense Nil
Salaries And Wages Nil
Interest Expense Nil
Other Operating Expenses [(5%)(100%)($10,000)] ( 500)
Capital Expenditures:
Building [(5%)(40%)($480,000)] ( 9,600)
Equipment Nil
GST Payable (Refund) ($ 6,850)

Notes:
• GST is not paid on purchases of zero-rated goods. As a consequence, no input tax credits can be claimed on
these purchases.
• Amortization expense does not affect the GST calculation.
• No GST is paid on salaries and wages, or interest. As a result no input tax credits are available.
• As more than 90 percent of the Other Expenses related to the provision of taxable supplies, the company is
eligible for a 100 percent input tax credit.
• Input tax credits on real property are available based on a pro rata portion of their usage in providing taxable
supplies.
• No input tax credits are available on capital expenditures other than real property if less than 50 percent of
their usage is to provide fully taxable and zero-rated supplies.
Solution to Assignment Problem Twenty-One - 9
Part A
Using the regular calculations, the GST payable for Kole Ltd. for the current year would be calculated as follows:

GST Collected [(5%)($175,000)] $8,750

Input Tax Credits:
Purchases [(5%)($95,000 - $10,000)] ( 4,250)
Amortization Expense Nil
Salaries And Wages Nil
Interest Expense Nil
Other Operating Expenses [(5%)($35,000)] ( 1,750)
Capital Expenditures [(5%)(100%)($52,500 ÷ 1.05)] ( 2,500)
GST Payable $ 250

Notes:
• Amortization expense does not affect the GST calculation.
• No GST is paid on salaries and wages, or interest. As a result no input tax credits are available.
• Full input tax credits are available on capital expenditures other than real property if more than 50 percent of
their usage is to provide fully taxable supplies.

Part B
As Kole’s GST included taxable sales of $183,750 [(105%)($175,000)] is less than $200,000 and it is not engaged
in an ineligible business such as accounting, Kole can use the Quick Method.

Part C
For retail operations using the Quick Method, the applicable percentages are 0.8 percent on the first $30,000 of
taxable sales in the year and 1.8 percent on any excess. The relevant percentages would be applied to the GST
included sales of fully taxable goods. The GST included sales of fully taxable goods would amount to $183,750
[(105%)($175,000)] and the Quick Method calculations would be as follows:

First $30,000 [(0.8%)($30,000)] $ 240

Remaining [(1.8%)($183,750 - $30,000)] 2,768
Total Before Capital Expenditures $3,008
Input Tax Credit On Capital Expenditures
[(5%) (100%)($52,500 ÷ 1.05)] ( 2,500)
GST Payable $ 508

In this case, the regular GST calculations produce a smaller payable.