Taxation Answers 2

Review based on Canadian Tax Principles 2009-2010 Edition by Byrd & Chen

Chapter 1 Solutions

1- ITA 3(a)

Interest income 150

Employment income 96

Property income 62,000 62,246

ITA 3(b)

Taxable capital gains 73,000

Less: Allowable capital losses (46,000) 27,000

ITA 3(c)

ITA 3(a) + ITA 3(b) 89,246

Less: subsection e deduction (10,000) 79,246

ITA 3(d)

Business losses (112,000)

Net income for tax purposes (32,754)

Adjusted net income for tax purposes 0

Business loss carryover is $32,754

2- ITA 3(a)

Employment income 23,000

Interest income 27

Property income 112,000 135,027

ITA 3(b)

Taxable capital gains 12,000

Less: Allowable capital losses (73,000) Nil

ITA 3(c)

ITA 3(a) + ITA 3(b) 135,027

Less: subsection e deduction (13,500) 121,527

ITA 3(d)

Business losses (60,000)

Net income for tax purposes 61,527 The allowable capital loss carryover is $61,000

Chapter 2 Solutions

1- Jan 1 to June 30: 41,000 km total 6,100 km personal Purchased for $65,000 Standby Charge= 2% x 65,000 x 6= 7,800 Operating cost benefit= 0.24 x 6,100= 1,464 Since the employment related use is over 50% a reduced standby charge is applicable. Reduced standby charge= 7,800 x [6,100 / (1,667 x 6)] = 4,757


Alternative operating cost benefit = 1/2 x 4,757 = 2379 We will only use the lower of the 2 standby charges + the lower of the 2 operating cost benefits Total minimum taxable car benefit = 4,757 + 1,464 = 6,221 2- 2009: Fair market value $42 Option price $30 Taxable benefit $12 Employment income = (15,000 x 12) / 2 = 180,000 / 2 = 90,000 The $90,000 will be added to Ms. Jane Deeres employment income for 2009. 2010: Sell price $60 FMV when purchased $42 Gain on sale $18 Capital gain = 15,000 x 18 = 270,000 Taxable capital gain = 270,000 x 1/2 = 135,000 Therefore Ms. Jane Deere will include $135,000 in her income as a taxable capital gain.

Chapter 3 Solutions

1- Employment income $72,000 Inheritance $125,000 this amount is not taxable since an inheritance is non-

taxable. Therefore the taxable income is $72,000 Federal tax payable 40,726 x 15% = 6,109 (72,000 40,726) x 22% = 6,880 Federal tax payable = 6,109 + 6,880 = 12,989 Federal tax credits Basic personal credit 10,320 Spousal 0 Child 2,089 Canada employment credit 1,044 Medical expenses* 9,989 EI 732 CPP 2,119

Subtotal 26,293 Federal rate x 15% Total 3,944 Charitable donations (4,872 +30) 4,902 200 x 15% = 30 16,800 x 29% = 4,872


Political donations (300 + 175 + 17) 492 400 x 3/4 = 300 350 x 1/2 = 175 50 x 1/3 = 17 Total federal credits 9,338 *calculation for medical expenses: Total medical expenses paid 12,000 Less: Lesser of: - 3% x 72,000 - 2,011 (2,011) Medical expense credit 9,989 Net Federal tax payable = 12,989 9,338 = 3,651

Chapter 4 Solutions

1- Class 1 Beginning UCC Balance 425,000

No additions or dispositions 0

CCA Base 425,000

2009 CCA (4%) (425,000) (17,000)

Jan 1, 2010 UCC Balance 408,000

Class 8 Beginning UCC Balance 160,000

Additions 56,000

Dispositions: lesser of:

-Capital cost (62,000)

-Proceeds of disposition (30,000) (30,000) 26,000

Less: 1/2 net additions (13,000)

CCA Base 173,000

2009 CCA (20%) (173,000) (34,000)

1/2 net additions 13,000



Additions 45,000

Dispositions: lesser of:

-Capital cost (27,000)

-Proceeds of disposition (16,000) (16,000) 29,000

Less: 1/2 net additions (14,500)

CCA Base 138,500

2009 CCA (30%) (138,500) (41,550)





CCA Base 60,000

2009 CCA (80,000 / 12) (6,667)





CCA Base 100,000

2009 CCA (25%) (100,000) (25,000)



Additions 22,000

1/2 net additions (11,000)

CCA Base 28,000

2009 CCA (55%) (28,000) (15,400)



CEC: Beginning Balance 200,000

2009 CEC (7%) (200,000) (14,000)

Jan 1, 2010 Balance 186,000

Chapter 5 Solutions

Accounting net income before taxes 1,263,000 Additions: Amortization 240,000 Bond discount amortization 5,000 Meals and entertainment (1/2) (48,000) 24,000 Warranty liability 20,000 Unfunded pension expense (167,000-150,000) 17,000 Foreign advertising 20,000 326,000 Deductions: CCA (280,000) Landscaping cost (35,000) (315,000) Net income for tax purposes 1,274,000

Chapter 6 Solutions

1- Disposition of property B: Beginning UCC balance 96,000 Less dispositions: Lesser of: -Capital cost 120,000 - Proceeds of dispositions 120,000 (120,000) (Recapture) or terminal loss (24,000) Disposition of property D: Beginning UCC Balance 202,000 Less dispositions: Lesser of: -Capital cost 275,000 -Proceeds of dispositions 250,000 (250,000)


(Recapture) or terminal loss (48,000) CCA calculation for property A (class 1): Beginning UCC Balance 163,000 CCA for the year (4%) (6,520) Ending UCC balance 156,480 CCA calculation for property C (class 3): Beginning UCC Balance 127,000 CCA for the year (5%) (6,350) Ending UCC Balance 120,650 CCA calculation for property E (class 1): Beginning UCC Balance 170,000 CCA for the year (4%) (1/2) half year rule (3,400) Ending UCC Balance 166,600 Gross rents 76,000 Add: recapture of CCA on the disposition of a rental property 72,000 Less: Expenses other than CCA (36,000) Rental income before CCA 112,000 Less: CCA from Class 1 (9,920) Less: CCA from Class 3 (6,350) Net rental income 95,730

2- Amount of dividend received 22,000

Add: Gross up (25%) 5,500

Taxable dividend 27,000

Federal and provincial tax payable on taxable dividends (23%) (27,000) 6,210

Federal and provincial dividend tax credit (2/3 +.2) (5,500) (4,767)

Net federal and provincial tax payable on taxable dividends 1,443

3- Amount of dividend received 22,000

Add: Gross up (45%) 9,900

Taxable dividend 31,900

Federal and provincial tax payable on taxable dividends (43.5%) (31,900) 13,877

Federal and provincial dividend tax credit (11/18+.27) (9,900) (8,723)

Net federal and provincial tax payable on taxable dividends 5,154

Chapter 7 Solutions

Proceeds of disposition 300,000 Less: Adjusted cost base 175,000 Capital gain 125,000 Taxable capital gain (1/2) (125,000) 62,500 2009 capital gain reserve = lesser of:

- 125,000 (225,000/ 300,000)= 93,750 - 125,000 (20%) (4-0) = 100,000

Capital gain for 2009= 125,000- 93,750 = 31,250 Taxable capital gain = 31,250 x 1/2 = 15,625


Therefore the capital gain reserve for 2009 is 93,750 and the taxable capital gains for 2009 are 15,625. 2010 capital gain reserve = lesser of:

- 125,000 (225,000 / 300,000) = 93,750 - 125,000 (20%) (4-1) = 75,000

Capital gain = 93,750 75,000 = 18,750 Taxable capital gain = 18,750 x 1/2 = 9,375 Therefore the capital gain reserve for 2010 is 75,000 and the taxable capital gains for 2010 are 9,375. 2011 capital gain reserve = lesser of:

- 125,000 (225,000 / 300,000) = 93,750 - 125,000 (20%) (4-2) = 50,000

Capital gain = 75,000 50,000 = 25,000 Taxable capital gain = 25,000 x 1/2 = 12,500 Therefore the capital gain reserve for 2011 is 50,000 and the taxable capital gains for 2011 are 12,500 2012 capital gain reserve = lesser of:

- 125,000 (225,000 / 300,000) = 93,750 - 125,000 (20%) (4-3) = 25,000

Capital gain = 50,000 25,000 = 25,000 Taxable capital gain = 25,000 x 1/2 = 12,500 Therefore the capital gain reserve for 2012 is 25,000 and the taxable capital gains for 2012 are 12,500 2013 capital gain reserve = lesser of:

- 125,000 (225,000 / 300,000) = 93,750 - 125,000 (20%) (4-4) = 0

Capital gain = 25,000 0 = 25,000 Taxable capital gain = 25,000 x 1/2 = 12,500 Therefore the capital gain reserve for 2013 is 0 and the taxable capital gains for 2013 are 12,500 There is no capital gain reserve and no taxable capital gain for 2014 and 2015.

Chapter 8 Solutions

Maximum amount of child care expenses = lesser of: Mr. Deere Mrs. Deere

- Actual Costs (175 x 40) 7,000 7,000 - Annual expense limit ( 4,000 x 2 + 7,000) 15,000 15,000 - Earned income for child care expenses

(2/3) (62,000) 41,333 (2/3) (57,000) 38,000

Since Mrs. Deeres net income for tax purposes is lower than Mr. Deeres, only she can receive the child care expense credit. Maximum base for this credit is $7,000.

Chapter 9 Solutions


1- Earned income = 45,000 + 17,000 - 1,000 = 61,000 RRSP deduction limit: RRSP deduction room 17,000 Add: lesser of: - RRSP dollar limit 21,000 - 18% of earned income 10,980 10,980 10,980 RRSP deduction limit 27,980 2- Earned income = 73,000 + 10,000 = 83,000 RRSP deduction limit: RRSP deduction room 6,000 Add: lesser of: - RRSP dollar limit 21,000 - 18% of earned income 14,940 14,940 14,940 Less: Pension Adjustment (5,500) RRSP deduction limit 15,440

Chapter 10 Solutions

2006 ITA 3(a) Employment income 20,000 Business income 12,000 Taxable dividends 2,000 34,000 ITA 3(b) Taxable capital gains 1,000 Allowable capital losses (9,000) nil ITA 3(c) ITA 3(a) + ITA 3(b) 34,000 Less: subdivision 'e' deduction (500) 33,500 ITA 3 (d) Farm loss* (6,250) Net income for tax purposes 27,250 Less: non-capital loss carryback from 2007 (15,250) (this leaves 18,450-15,250= 3,200 from 2007) Taxable income 12,000 Taxable income will be 12,000 as this is the amount of taxable income required to use his personal tax credits. *Farm loss calculation: First 2,500 2,500 1/2 of (10,000-2,500) 3,750 Total farm loss for 2006 6,250 Carryforwards: Net capital loss carryforward= 9,000-1,000= 8,000 Restricted farm loss carryforward= 10,000-6,250= 3,750 2007


ITA 3(a) Employment income 15,000 Farming income 15,000 Taxable dividends 2,300 32,300 ITA 3(b) Taxable capital gains 12,000 Allowable capital losses (1,000) 11,000 ITA 3(c) ITA 3(a) + ITA 3(b) 43,300 Less: subdivision 'e' deduction (1,000) 42,300 ITA 3 (d) Business loss (37,000) (18,550) Net income for tax purposes 5,300 23,750 Less: net capital loss carryforward from 2006 (8,000) (8,000) Less: restricted farm loss carryforward from 2006 (3,750) (3,750) Taxable income (6,450) 12,000 Since Mr. Happee would like to use the maximum amount of carryforwards each year, we will lower the amount of business loss being used for this year. This will cause a non-capital loss carryforward. Taxable income will be 12,000 as this is the amount of taxable income required to use his personal tax credits. Carryforwards/carrybacks: non-capital loss carryforward or carryback= 37,000-18,550= 18,450 non-capital loss carryforward after the carryback= 18,450-17,250= 1,200 2008 ITA 3(a) Employment income 25,000 Farming income 6,000 Taxable dividends 700 31,700 ITA 3(b) Taxable capital gains 6,000 Allowable capital losses (4,000) 2,000 ITA 3(c) ITA 3(a) + ITA 3(b) 33,700 Less: subdivision 'e' deduction (700) 33,000 ITA 3 (d) Business loss (10,000) Net income for tax purposes 23,000 Less: non-capital loss carryforward from 2007 (1,200) Taxable income 21,800 There are no carryforwards or carrybacks at the end of 2008.


1- Yes, installments are required for John Doe. Option 1: Installment 1- 7,500 / 4 = 1,875 Installment 2- 7,500 / 4 = 1,875 Installment 3- 7,500 / 4 = 1,875 Installment 4- 7,500 / 4 = 1,875


Option 2: Installment 1- 2,500 / 4 = 625 Installment 2- 2,500 / 4 = 625 Installment 3- 2,500 / 4 = 625 Installment 4- 2,500 / 4 = 625 Option 3: Installment 1- 4,000 / 4 = 1,000 Installment 2- 4,000 / 4 = 1,000 Total for installments 3 and 4 = 2,500 (1,000 + 1,000) = 500 Installment 3- 500 / 2 = 250 Installment 4- 500 / 2 = 250 2- No, installments are not required for Jane Doe. 3- Yes, installments are required for Harper Happee. Option 1- Installment 1- 3,000 / 4 = 750 Installment 2- 3,000 / 4 = 750 Installment 3- 3,000 / 4 = 750 Installment 4- 3,000 / 4 = 750 Option 2- Installment 1- 800 /4 = 200 Installment 2- 800 /4 = 200 Installment 3- 800 /4 = 200 Installment 4- 800 /4 = 200 Option 3- Installment 1- 9,200 / 4 = 2,300 Installment 2- 9,200 / 4 = 2,300 Total for installments 3 and 4 = 800 (2,300 + 2,300) = (3,800) Since we get a negative amount for the total for installments 3 and 4 payment is required for those two installments. Therefore, Installment 3- 0 Installment 4- 0


1- She is a deemed resident since she is dependent on her father who is a deemed resident 2- He would be a non-resident since he does not live in Canada. He is not a resident and he would not be considered a sojourner, so he is not a deemed resident. He would still have to pay Canadian taxes on his Canadian income. 3- John Deere is a part-year resident. He would be taxed on his income from January 1 until the day that he no longer was a Canadian resident which was September 22. He would not be taxed on any of his income earned after September 22.

Taxation Answers 2

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