For the taxation year ending December 31, 2023, the income statement of Markham Ltd. was as follows: Revenues $973,000 Expenses: Cost of Goods Sold ($272,000

Introduction

Assignment 2 is based on Modules 5 and 6 and should be completed at the end of Module 6. To solidify your understanding of the content of the two modules covered, be sure to complete the self-test questions set out in the modules’ activity checklists before you start the assignment.

Instructions

Read the following information and then answer the related questions. If you have difficulty completing this assignment, go back and closely review the assigned material again.

Question 1 ( 15 Marks)

Case A: There are many similarities and differences as to the treatment of business income for accounting and income tax purposes. Identify at least four of the notable differences in treatment.

Case B:

ITA 18 lists several general limitations that affect what can be claimed as a deduction with respect to a business. Identify four of these limitations.

Case C: The sale of inventories is treated differently than the sale of non-depreciable capital property. Briefly describe the different treatments of these two types of properties.

Case D: Both employees and individuals carrying on a business as a sole proprietor can claim expenses for a home office. Is the income tax treatment the same? If not, describe the differences.

Case E: ITA 67 provides a general restriction on the ability to claim a deduction for unreasonable expenses unless the outlay or expense is reasonable in the circumstances. Provide two examples of an outlay or expense that would not be considered reasonable in the circumstances.

Question 2 ( 30 Marks)

For the taxation year ending December 31, 2023, the income statement of Markham Ltd. was as follows:

Revenues $973,000

Expenses:

Cost of Goods Sold ($272,000)

Selling and Administrative Expenses (132,000)

Amortization Expense (156,000)

Other Expenses (137,000) (697,000)

Income before Income Tax Expense $276,000

Income Tax Expense:

Current ($ 97,000)

Future (32,000) (129,000)

2023 Net Accounting Income $147,000

Other Information:

1. The Company spent $6,000 during the year on landscaping for its new building. For accounting purposes, this was treated as an asset. The Company will not amortize this balance as it believes the work has an unlimited life.

2. Selling and Administrative expenses include $15,000 in business meals and entertainment.

3. Selling and Administrative expenses include membership fees for several employees in a local golf and country club. These fees total $3,400.

4. Other Expenses included donations to registered charities of $3,700.

5. Other Expenses included bond discount amortization of $2,500.

6. In 2023, Markham Ltd. purchased a competing business at a price that included goodwill of $70,000. For accounting purposes, there has been no impairment or write-down of the goodwill since its purchase.

7. As the Company expected to issue more shares in 2024, it made several amendments to its articles of incorporation in 2023. Legal expenses, included in Other Expenses, totaled $6,000.

8. On January 1, 2023, the Company had UCC balances for the following classes of depreciable property:

Class 1 $400,000

Class 8 575,000

Class 10 45,000

Class 13 68,000

The Class 1 balance related to a single building acquired in 2003 at a cost of $550,000. It was estimated that the value of the land at this time was $50,000 and the building $500,000. On February 1, 2023, the building was sold for $612,000. It was estimated that the value of the land was unchanged at $50,000 and that the value of the building was $562,000. For accounting purposes, the carrying value of the property was $507,000: $457,000 for the building and $50,000 for the land. The resulting gain on the building was included in the accounting revenues. The old building was replaced on February 15, 2023, with a new building acquired at a cost of $683,000, of which $60,000 was for the land and $623,000 for the building. The Company chose not to elect a separate Class 1 so it did not qualify for the 6% CCA rate. No elections were made with respect to the replacement of the building.

There were no dispositions of any Class 8 property in 2023 however there were purchases of Class 8 property of $126,000.

As the Company had decided to lease all of its vehicles in the future, all of the Class 10 properties were sold during the year. The capital cost of the properties sold was $93,000 and the sale proceeds were $37,000. The carrying value for accounting purposes was $52,000 and the resulting accounting loss of $15,000 ($37,000 – $52,000) was included in Other Expenses.

The Class 13 balance related to a single lease that commenced on January 1, 2021. The lease had an initial term of seven years, with two successive options to renew for three years each. Expenditures on this leasehold were $50,000 in 2021 and $27,000 in 2022. There were no further expenditures in 2023. The write-off of these expenditures for accounting purposes was included in Amortization Expense.

9. Other Expenses included interest on late income tax instalments of $500 and on late municipal tax payments of $275.

10. Markham Ltd. claimed the maximum CCA in each year.

Required: Determine Markham Ltd.'s 2023 net income. In addition, calculate the January 1, 2024 UCC for each CCA class. Ignore immediate expensing and any GST/HST and PST considerations.

Question 3 ( 20 Marks)

Carol Basque is an experienced lawyer who carried on a business as a sole proprietor. She carried on the business out of a new building which she purchased several years ago for $725,000, with $175,000 paid for the land and $550,000 for the building. The building was used exclusively for business purposes, and an election was filed to include it in a separate Class 1. The UCC on January 1, 2023 was $447,831.

As her practice specialized in cases where lack of anger management had caused legal difficulties, she has had to replace her office furniture several times. The latest was in 2023, when the divorcing owners of a martial arts club could not come to a peaceful resolution on an equitable split of family assets. A registered charity, Ex-Cons R Us, hauled her destroyed furniture away. No insurance or other amounts were received with respect to the damage.

The old furniture had a capital cost of $53,000 and the new furniture was purchased for $78,000. The January 1, 2023 Class 8 UCC was $38,160.

In January 2021, Carol acquired a $92,000 Lexus that she used largely for business purposes. In 2023, she had concluded that, given the nature of her clientele, this automobile appeared too luxurious. Based on this view, she traded the Lexus for a $28,000 Toyota automobile. The January 1, 2023 UCC for the Lexus was $17,850. Neither of the automobiles were zero-emission vehicles.

Because the Lexus had been badly damaged by an existing client who lost his case, the trade-in allowance that she received was only $22,000. In 2023, the Toyota was driven 41,000 kilometers, with 38,000 driven for business purposes and only 3,000 for personal use. The operating expenses for the year were $6,150. Assume that the operating expenses for the Lexus were correctly calculated and included in the accounting expenses.

Other 2023 purchases include the following:

New Computer $ 1,250

Applications Software 1,475

Client List from retiring lawyer 32,000

Other 2023 business expenses, determined on an accrual basis, include the following:

Building current expenses $27,300

Payments to Assistants (Note*) 46,100

Miscellaneous Office Expenses 13,600

Meals with Clients (not billed to clients) 15,500

*Note: The payments include $25,000 paid to her 17-year-old daughter. The daughter worked part time during the school year and full time during the summer, doing online research for Carol's practice. The fees paid to the daughter were considered reasonable (ITA 67).

In 2023, business revenues were $297,800.

Required: Calculate the 2023 business income. In preparing your solution, ignore immediate expensing, CPP issues, and any GST/HST and PST considerations.

Question 4 (15 Marks)

Case A: Indicate two differences between the income tax treatment of business income and property income.

Case B: Briefly describe the "disappearing source" rule.

Case C: Each rental property that is owned by an individual that has a cost more than $50,000 is added to a separate Class. What is the purpose of this separate class treatment?

Case D: Eddy Edwards financed the purchase of an income producing property. The cost of the property was $435,000 and Eddy financed 100% of the purchase. The investment proved successful, with the property being sold for $610,000. He used the sale proceeds to purchase two properties with costs of $495,000 and $115,000 respectively. Is the interest expense on the original loan still deductible and if yes, how does this occur?

Case E: Betty Bond borrows $220,000 to purchase an income producing property. The results from this investment were not promising and, as a result, she sold the investment for $150,000. She used these funds to buy two properties. The first property cost $35,000, while the second property cost $115,000. How will the $220,000 in borrowing be traced to the two properties?

Question 5 (20 Marks)

Mr. Taylor bought a large triplex on February 1, 2022 for a total cost of $345,000. Of this amount, it was estimated that $255,000 was attributable to the building and $90,000 to the land. The three rental units in the triplex were identical in size and features and, for purposes of allocation to a CCA class, the property was a single property.

At a bankruptcy sale in February 2022, Mr. Taylor purchased furniture and appliances for one of the units at a total cost of $12,800.

Early in February 2022, all three units were rented. In 2022, Mr. Taylor's triplex generated rents of $36,000 and incurred expenses, other than CCA, of $10,900.

In May of 2023, the tenants in the furnished unit moved out and purchased all the furniture and appliances from Mr. Taylor for $7,840. In 2023, Mr. Taylor's triplex generated rents of $28,400 and incurred expenses, other than CCA, of $18,180.

Mr. Taylor claims the maximum CCA allowable in both 2022 and 2023.

Required: Calculate the rental income for each of 2022 and 2023. Also, determine the UCC balances on January 1, 2024. Include in your solution any income tax consequences associated with the sale of the furniture and appliances. Ignore immediate expensing.

Introduction

Assignment 3 is based on Modules 7 to 9 and should be completed at the end of Module 9. To solidify your understanding of the content of the three modules covered, be sure to complete the self-test questions set out in the modules’ activity checklists before you start the assignment.

Instructions

Read the following information and then answer the related questions. If you have difficulty completing this assignment, go back and closely review the assigned material again.

Case A: Describe three distinct types of capital property dispositions. In each case, indicate how the POD would be determined.

Case B: A business might offer a warranty when it sells capital property. This may involve incurring warranty expenditures in the periods after the sale. How are such warranty expenses treated for income tax purposes? How does this differ from the accounting treatment of such expenditures?

Case C: When a taxpayer disposes of a combination of land and buildings, ITA 13(21.1)(a) contains a special rule for determining the amount of proceeds to be allocated to the building. If applicable, this special rule increases the amount of the proceeds that will be allocated to the building. What is the tax policy objective of this special rule?

Case D: In terms of income tax planning, capital gains and capital losses have an advantage that is not available for other types of income. Briefly describe this advantage.

Question 2 ( 10 Marks)

Multi Inc., a company with a December 31 taxation year end, carries on business out of a single Class 1 building that cost $815,000. At the beginning of 2022, the UCC balance for the class was $648,275. On June 30, 2022, a tornado destroyed the building. The building was insured for its FMV of $1,000,000 and the insurance company paid that amount in September 2022. Multi Inc. replaced the building in 2023 with a used building, at a cost of $1,075,000. Multi Inc. wanted to minimize income tax to the extent possible.

Describe the 2022 and 2023 income tax consequences of these events, including the capital cost and UCC balance for the replacement building at the end of 2023. Ignore any gain or loss related to the land on which the building was situated.

Question 3 ( 25 Marks)

Each of the following independent Cases describes a situation with a proposed tax treatment.

1. Herbert Nash has owned a 200-acre parcel of land for several years. He had purchased the land for $250,000 with the intention of eventually building a home on the property. However, he received an offer of $425,000 for 75 acres of the property. Because these 75 acres had waterfront and better road access, he believed that the FMV of the remaining 125 acres was only $175,000. He accepted the offer and planned to use an ACB of $177,083

[$250,000 X $425,000/($425,000 + $175,000)] in calculating his gain or loss.

2. Gregory Hayes sold a capital property with an ACB of $85,000 for $135,000. The $135,000 price included a charge for a warranty on the property which he anticipates will cost him $5,000 to service. He did not anticipate any of the warranty expenses would be incurred in the year of the sale. He planned to recognize a capital gain on the transaction of $45,000 after the consideration of the estimated warranty costs.

3. During the current year Ms. Kristy Stone sold her sailboat to an arm's length person for $71,000. She had purchased the boat several years ago for $51,000. Also, during the year, she sold securities with an ACB of $22,000 for $12,000. She intends to deduct the loss on the securities against the gain on the sailboat.

4. Nellie Ward had a cottage which she had owned for a number of years. Nellie Ward purchased the cottage for $125,000. It is currently worth more than $500,000. While she has rarely used it, preferring to stay in her penthouse in the city, she believed that it would continue to increase in value. Given this, she decided to convert it to a rental property. While she planned to report her future rental income to the CRA, she did not plan to recognize a capital gain on the conversion of the property, since there was no actual disposition.

5. During the current year, Ignacio Rogers sold a non-depreciable capital property for $216,000. The ACB of the property was $184,000, resulting in a capital gain of $32,000. Under the terms of the sale, he would receive 10% ($21,600) of the sale price in the year of the sale, with the remainder due in the following year. As a result, he would recognize only $3,200 of the capital gain in the year of the sale.

Required: In each of the preceding Cases, indicate whether you believe that the income tax treatment proposed is the correct one. Explain your conclusion.

Question 4 ( 25 Marks)

In each of the following independent Cases, determine the maximum amount of 2023 personal tax credits, including transfers from a spouse or dependant, that can be applied against federal income tax payable. Ignore, where relevant, the possibility of pension income splitting.

A calculation of federal income tax payable is NOT required, only the personal tax credits.

1. Sarah Partridge was 72 years old and had net income of $61,300. This total was comprised of OAS and pension income from her former employer. Her husband was 58 years old and had a net income of $4,725.

2. Martin Brody was divorced from his wife several years ago. He has custody of their four children, ages 7, 9, 12, and 15. His net income was $54,000 which consisted of spousal support payments. The children were all in good health. The oldest child had net income of $11,200 during the year. None of the other children had any income.

3. Marion Lassiter had net income of $132,450, all of which was rental income. Her husband had a net income of $1,600. They had three children, ages 14, 16, and 19. All these children were in good health and continued to live at home. The 19-year-old child had a net income of $8,460. None of the other children had any income. During the current year, Ms. Lassiter paid the following medical expenses:

Marion $ 4,240

Her Spouse 3,450

14-Year-Old Child 1,860

16-Year-Old Child 2,450

19-Year-Old Child 6,720

Total $18,720

4. Janice Archer had a net income of $92,100, none of which was employment income or income from carrying on a business. Her spouse had a net income of $7,240. Their daughter was 15 years old, lived with them, and had a net income of $2,150. Their son was 22 years old and, because of a physical infirmity, continued to live at home. He had no net income as he volunteered for a non-profit organization that provided services to disabled individuals. His disability was not severe enough to qualify for the disability tax credit.

5. Joan Baxter had a net income of $85,000, all of which was employment income. Her employer withheld maximum CPP contributions and EI premiums. She was married to John Brown whose net income was $4,230. They had three children aged 7, 9, and 11. All the children were in good health and none of them had any income.

Question 5 ( 30 Marks)

Joan Galley was a salesperson for Goodship Lollipop Ltd., a Canadian public corporation with gross revenues of $45 million. The company produced various sweets, such as candy and chocolate bars.

It was a stressful time for Joan these last 18 months. In the summer of 2022, her spouse passed away. Joan has two children: Ryan who is 13 and Julie who turned 18 on April 30, 2023.

Joan's 2023 employment contract stated that the Company would pay Joan an annual base salary of $50,000 plus a commission of 1.5% of her annual cash sales. Her 2022 sales totaled $3,200,000, with $200,000 of this total collected by the Company in 2023. Her 2023 sales amounted to $2,800,000, but the Company had yet to collect $300,000 of these by December 31, 2023.

In 2023, the Company paid Joan her base salary plus her commission income. A review of her last pay stub for 2023 revealed the Company withheld the following from her salary for the year:

Contributions to the Company RPP $3,000

CPP Contributions 3,754

EI Premiums 1,002

Premiums for the Company's Dental and Health Plan* 1,500

Federal Income Tax Withheld 15,000

* The plan was funded 50/50 by the employees and the employer and was a Private Health Services Plan (PHSP).

The Company's group term life insurance covered Joan. Her coverage was equal to her annual base salary. The Company paid a premium of $5 for every $1,000 of coverage to the Sweet Life Insurance Company.

In January of 2023, Joan detected a packaging problem with a particular line of candies before the Company shipped them. Her keen eye saved the company an estimated $360,000 in product recalls. This helped her win the employee of the year reward, which was an iPad2 which cost the company $900.

In September of 2022, the Company transferred her from Montreal to Toronto. She thought the change would be beneficial. The Company paid for all her moving expenses. Unfortunately, due to the quick sale of her Montreal home, she incurred a $30,000 loss on its sale. The Company agreed to reimburse her $20,000 for the loss. The Company paid Joan the $20,000 on January 14, 2023.

In April of 2022, the Company granted her the right to purchase up to 5,000 shares of the Company for $17 per share under the employee stock option plan. At the time the Company granted the option, the shares were trading at $15. On February 1, 2023, when the shares were trading at $20 per share, she exercised her option on 3,000 shares. She sold 2,000 shares at $22 per share with a settlement date of December 30, 2023.

To purchase the 3,000 shares, Joan negotiated an interest free loan from the Company for the purchase price. The Company gave Joan the loan on February 1, 2023. Joan repaid the loan in full on December 31, 2023.

Throughout 2023 the Company provided her with an automobile, which it leases for $450 a month. The automobile was also available for her personal use. During the year, Joan drove a total of 35,000 kilometers, 8,000 of which were personal and 27,000 of which were for employment purposes. Except for $2,200 of car insurance, the Company did not pay for any of her automobile operating expenses as these were Joan's responsibility.

Joan was responsible for her salesperson expenses (including the automobile operating expenses). During the year she incurred the following:

Total Automobile Expenses (Excluding Insurance) $5,400

Meals and Entertainment with clients (not billed to clients) 2,600

Hotels 1,500

Joan incurred all the meals and entertainment with clients while she was away for a minimum of 24 hours.

Joan was a member of the Confectioners’ Association of Canada, a professional association. Her annual membership dues were $1,400, which she personally paid.

Joan met all the conditions of ITA 8(1)(f) (deductible salesperson expenses).

Joan had a sideline business called The Cup Cake Diva which she operated as a proprietorship. She started her business venture 10 years ago and continued it in Toronto. Joan prepared and sold cupcakes and other pastries from her home. Ninety percent of her sales were made for social events which were held typically on weekends.

Joan provided you with the following information for 2023 with respect to her business:

Sales Revenues $42,000

Supplies (Flour, Sugar, Boxes, Etc.) Purchased 12,000

Purchase of New Commercial Oven

(For Business use only) 2,200

Purchase of new automobile for cash (Not zero-emission) 39,000

Automobile operating expenses 3,000

With respect to the supplies, she had an opening inventory of $1,600. On December 31, 2023, the inventory of supplies was $900.

Early in January 2023, Joan sold her old automobile for $12,000. It cost $35,000. Joan’s business used both the old and the new automobiles exclusively. Any personal use was derived by Joan using the Company provided automobile.

Joan’s daughter Julie helped with the business. She made the deliveries to practice her driving and the daughter showed real aptitude for dealing with clients. Joan did not offer her any monetary compensation as Julie was happy to be driving a new automobile at this time.

Joan used 20% of the livable space in her home (including a component for shared areas) for her business. Her 2023 household expenses include the following:

Utilities $5,400

Municipal Property Tax 3,800

Maintenance 1,600

Dedicated Phone Line for the business 800

Home Insurance 1,900

Mortgage Interest 12,300

The January 1, 2023 UCC balances were as follows:

Class 8 $3,100

Class 10.1 9,000

Joan did not claim CCA on her home as she realized that if she did, this would result in future recapture and capital gains implications.

Her son Ryan was in high school and had no income of his own.

Her daughter Julie, not knowing which university program she would like to attend, enrolled part-time (4 months) at a local college. Joan agreed to pay Julie’s tuition of $1,600 if Julie agreed to transfer any related credit to Joan. Julie’s 2023 net income was $7,200.

During the year, Joan paid $5,000 for orthodontic work (braces) for Ryan. The Company reimbursed her 50% of the amount through the company’s dental and health plan.

In 2023, Joan made $1,600 donations to registered charities.

Assume the prescribed interest rate for loan benefits during all four quarters of 2023 was 1%.

Required:

A. Determine Ms. Galley’s minimum:

1. 2023 Net Income,

2. 2023 Taxable Income,

3. 2023 Federal Income Tax Liability or Refund.

In determining these amounts, ignore immediate expensing and any GST/HST & PST considerations.