Taxation in the United States and Tax Return
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Cindy Loo Hoo was born on January 1, 1969. She resides at 543 Apple Crescent, Winnipeg, Manitoba, R2G 1A1. Her telephone number is (204) 277-7777 and her Social Insurance Number is 111 000 111. Cindy has the following income tax transactions for 2013:
Cindy separated from her husband Ken, on May 1, 2013. They had been married for 10 years, and they parted on good terms. Cindy verbally agreed to pay $50,000 to Ken to allow him to buy household furniture and make a down payment on a house. She also agreed to pay a monthly support allowance of $600 per month until Ken found a job. The $50,000 was paid in May 2013, and the monthly support payments began on June 1, 2013, and continued throughout the remainder of 2013. In November 2013, Cindy left Readers Ltd., where she had worked since April 2000; she had not been a member of an RPP or a DPSP with that employer. In December 2013, she took a new job with Writers Ltd. She was a member of that company’s RPP at the end of the 2013 taxation year.
The UCC of the building was $150,000 on December 31, 2012. Cindy considers that the net rental income should be nil for 2013, since she can claim a CCA deduction of $4,400. The maximum available is $6,000 ($150,000 × 4%) because the property is the only asset included in class 1. A fire completely destroyed the building on December 1, 2013. The insurer paid Cindy $180,000 for the building on December 29, 2013, and she then sold the land for $30,000 on the same date. Cindy had acquired the property on August 15, 1999, at the following costs: Land
Cindy loaned $2,000 in 2007 to Adam Ltd., an SBC. The rate of interest on the loan was 5%. On October 12, 2013, she was advised that Adam Ltd. had declared bankruptcy and that the entire loan and interest would not be paid. Cindy set up a sideline business effective July 1. The proprietorship provides local walking and hiking trips. The business year-end is December 31, 2013. She has provided you with the following information for 2013: OUT AND ABOUT
Cash-Flow Statement from Proprietorship
July 1 to December 31
Cash receipts (Note a)
Advertising (Note b)
Licences (Note c)
Salary paid to Cindy
a. Cash receipts do not include $4,000 in payments received from customers in January for all December trips and outstanding accounts receivable. b. Advertising includes $500 of meals and entertainment expenses relating to promoting business with clients. c. Licences expense includes $400 for golf memberships for Cindy. She has met several potential new customers through the club. The remaining amount was for business licensing. Since Cindy has a sightseeing business, she has various annual license fees that she pays to the city for access to city sites. d. Cindy has not claimed a donation tax credit in prior years.
In September, Cindy won a new car through a minor hockey association ticket raffle. The prize had an estimated fair market value of $18,000. On December 1, 2013, Cindy moved to avoid a 90-kilometre drive to her new workplace. Her new residence is 25 kilometres from the new workplace. In moving, she incurred the following expenses, which were not reimbursed by Writers Ltd.: Legal expenses with respect to purchase of new residence
Cost of transporting household effects (Bumpem and Breakem Hauling Ltd.) $
Commission on sale of old residence
New furniture, carpets, and drapes
Sale price of old residence
Cost of acquisition of new residence
Cindy sold a painting in April 2013 for $3,000. The painting was acquired in 2000 for $1,000. She also sold 100 shares of a Canadian public corporation on November 15, 2013, that were acquired in 1997: POD
She received an eligible dividend of $300 in 2013.
Cindy has $20,000 of unused RRSP deduction room carried forward from 2012. Required
a. (30 marks)
Calculate Cindy’s income for 2013 under section 3. Show all your calculations. Explain the tax treatment of any items not included in your section 3 calculations, and identify any deductions that Cindy can carry forward to 2014. b. (2 marks)
Manually compute Cindy’s maximum deductible contributions to an RRSP for 2014. c. (10 marks)
Use Cantax to calculate and report Cindy’s income-tax related transactions for 2013. State the values found in the following lines of the tax return: i. Line 126
ii. T1-S1-2, line 425
iii. T1-S1-1, line 349
iv. T1-S3, line 199
v. T776#01- 2, line 9924
d. (4 marks)
Based on your answer in (a) regarding the deductibility of the payments made to Ken, what suggestion could you make to Cindy for 2013 and/or future taxation years if she consults you on January 1, 2014? Justify your answer by providing the appropriate references to the ITA. e. (4 marks)
Cindy received a Notice of Reassessment from the CRA dated November 18, 2013, and mailed the same day, amending her 2011 income tax return. The CRA disallowed her deduction for a business investment loss claimed in 2011. Cindy disagrees with the reassessment notice and has detailed information regarding the amount claimed. Advise Cindy on how to respond to this reassessment. Procedure for part (c)
1. Start Cantax and open the tax return file TX1(2A). The basic personal information has been pre-entered. Save this tax return under your own initials. 2. Enter the amounts calculated in part (a) in the appropriate schedules. 3. After entering all the data, display the tax summary. Cindy’s net income should be equal to the net income you calculated in part (a). 4. Save the tax return and print schedules T1-1 to T1-4, T1-S1, T1-S3, T-1M#01, T776, T776#01-1, and T776#01-2. From the printouts, determine the answers to part (c). Question 2 (10 marks)
Mark Jacobs, a well-known Toronto artist, signed a contract with the University of Toronto to beautify the campus. Mark spent all year completing the beautification. During that time, he enhanced the campus with his own artwork, bought pieces at local auctions, and commissioned pieces by other artists. The university restricted Mark’s choice of art to Canadian artists. The university also controlled the colour schemes and the types of art selected (for example, paintings, sculptures, or murals) for the various locations on campus. However, within these requirements, Mark was permitted to exercise artistic discretion over the actual pieces chosen. This gave him a great degree of latitude over the beautification of the campus.
Mark could produce the art himself, purchase or commission another artist’s work, and focus on any theme he desired. He worked at his own studio and used his own tools for his own productions. If the University did not like the art he produced or bought, he was not reimbursed costs and had to sell the art on the open market. The University gave him access to an office to allow him to meet with other artists he was considering for the project. A representative from the university was not required to be present with Mark in his meetings with other artists. During the year, Mark channelled all his energy into the university’s beautification and did not produce art for outside clients.
What is the proper tax treatment for Mark’s income from this contract? Explain your reasoning. Question 3 (8 marks)
Answer the following questions, giving your justification in each case: a. (3 marks)
Subsection 8(6.1) provides detailed criteria with respect to what is an eligible tool of a tradesperson for purposes of the deduction in subsection 8(1)(s). The criteria are set out in paragraphs (a) to (d). Must all the criteria be met for the deduction to be allowed? Explain your reasoning. b. (2 marks)
Section 62(3) defines “moving expenses” for the purposes of section 62(1). Is this an exhaustive list? Explain your reasoning. c. (3 marks)
Section 10(1) indicates inventory shall be valued at the lower of cost or fair market value, whichever is lower, or in a prescribed manner. Where would you find information on the “prescribed manner” that must be used for this section? Question 4 (9 marks)
Mad about Wraps Inc., a company owned by Martha Mod, has been operating two locations in British Columbia since 1994. Its fiscal period ends December 31. In 2014, the company bought four more locations and, in addition to paying for other assets, paid for goodwill as follows:
Mad About Wraps Inc. sold the two original locations and received the following amounts for goodwill:
The balance in the cumulative eligible capital account at the end of 2011 was $20,000 after the deduction allowed under paragraph 20(1)(b). There were no additions or dispositions of ECP in 2012 or 2013. The maximum deduction allowable under paragraph 20(1)(b) was claimed each year. Required
State the tax implications for Mad About Wraps Inc. with respect to the goodwill in the 2014 taxation year. Show all your calculations and round all amounts to the nearest dollar. Question 5 (23 marks)
Edith Cleaver earns income in excess of $200,000 each year. She is married to Paul Smith and has two children, Michael, age 20, and Judy, age 14. Edith has heard about income splitting and is thinking of transferring shares of RW Ltd., a public corporation, to her husband and children so that dividends may be paid to them in the future. She acquired 100 common shares of RW Ltd. in 2000 for $ 10,000. She wants to give 35 shares to her husband and 20 shares each to her two children. The FMV of the 100 shares is currently $ 2,000,000. Edith inherited a parcel of land from her father in 1987. She sold the land in 2014 for $100,000. The value in 1987 was $20,000. The purchaser paid $20,000 cash, with the remaining $80,000 plus interest due in 2016.
Edith has calculated her capital gain as $80,000. Edith also owns a chalet she acquired in 2001 for $40,000. It was rented until December 2011, after which time it was used by Edith and her family for their pleasure. The FMV of the chalet was $65,000 in December 2011, and in January 2014 it was sold for $109,000. Edith paid $3,500 to the real estate broker who negotiated the sale. No CCA had ever been claimed, and an election under subsection 45(3) was included in Edith’s 2011 income tax return. Edith and her husband also own a house that they lived in since they were married in 1988. They paid $70,000 for their house, which is now worth $300,000. Required
a. (15 marks)
Explain to Edith the tax consequences for herself, her husband, and her children, of the gift of the shares to each member of her family. State the immediate tax consequences and what the tax consequences would be when dividends are paid on the shares, and when the shares are eventually sold by Judy, Michael, and Paul. Show all your calculations. b. (4 marks)
Determine if Edith’s calculation of her capital gain is correct. Indicate whether she has any other alternatives for reporting the gain in 2014. Support your answer with appropriate references to the ITA. c. (4 marks)
Determine the tax consequences for Edith for 2014 for the disposition of the chalet, and identify any elections she can make.