Taxation – Assignment #1

Winter 2021

uestions
Ques 1

Sara Small has provided you with the following list of her various sources of income.

Gross Salary $92,000

RRSP Withdrawal 10,000
Income from renting a house 7,500
Her share of partnership loss (9,000)
Capital gains 22,000
Capital losses (25,000)
Interest received from her Government of Canada bond 1,400
Lottery winnings 10,000

During the year Sara had the following disbursements.

RRSP contribution $ 3,500

Union Dues deducted from her paycheque 1,200
Wages paid to an assistant 5,000
Total automobile operating costs (Sara uses her personal car 25% 8,000
for employment purposes and 75% for personal use). She is
required under the terms of her employment contract to use her
personal automobile and pay her operational costs.
Mortgage payments on principal residence (Her home) 32,000
Support payments to her former spouse 2,400
Support payments to her 2 children (her spouse has custody) 2,400
Payments on her personal car loan 6,000

REQUIRED:

Part A: Using Section 3 of the Income Tax Act, compute Sara’s net income under Division B,
applying the “source” and “ordering” concept. Use the template provided to record your
answer. (14 marks)

Part B: Prepare a list of the items that were not included in your calculation of Division B (net)
income. (6 marks)
Taxation – Assignment #1
Winter 2021

Para. Item Amount

3(a)

3 (b)

3 (c)

3 (d)

Division B (net) income Total 3(d)

Part B: Items not included in the calculation of Division B (net) income

Taxation – Assignment #1
Winter 2021

Question 2

Review the following scenarios and answer the accompanying questions. Show all calculations
for full marks.

Part A: On May 1, 2020, Ms. Sherry receives a $215,000 loan from her employer in order to
assist her in purchasing a new home. The loan requires no payment of interest but must be
repaid in annual instalments of $30,000 on December 31 in each of the years 2021 through
2027.
Assume that the relevant prescribed rate is 4 percent during the first two quarters of 2020, but is
reduced to 3 percent in the third quarter, and to 2 percent in the fourth quarter.
What is the amount of Ms. Sherry's taxable benefit on this loan for the year? (4 marks)

Part B: Mr. Bill Downs has been employed for many years by a Canadian controlled private
corporation. Several years ago, Mr. Downs was granted options to acquire 4,000 shares of his
employer's stock for $53 per share. At this time, the shares have a fair market value of $50 per
share. On July 15, 2019, Mr. Downs exercises all of these options. At this time, the fair market
value of the shares is $82 per share. In February 2020, he sells all of the shares for $97 per
share.
Calculate the effect of the transactions that took place during 2019 and 2020 on Mr. Downs' Net
Income For Tax Purposes and Taxable Income. Where relevant, identify these effects
separately. (11 marks)
Taxation – Assignment #1
Winter 2021

Question 3

Alicia Arden has established herself as a very effective sales representative for products related
to health care services.  While she has worked independently for a number of years, she has
received an attractive offer of employment.  This offer would require that she begin work on
January 2, 2020.
This offer would provide her with a fixed salary of $225,000 per year with no
commissions on her sales.  The employer would provide an allowance of $30,000 per
year to cover hotel, meals, and airline costs.  The employer believes that the CRA will
consider this allowance to be reasonable in the circumstances.  With respect to
advertising and promotion expenses, no allowance or reimbursement would be provided.
This employer would provide her with an automobile which would be leased at a cost of
$775 per month.  The employer will pay all of the operating costs of the automobile.
This employer would provide her with a $205,000 interest free loan in order to facilitate
her investment activities.  The loan will have to be repaid after five years.

Other Information
The following information is applicable to either of the alternative offers.
1. She estimates that her employment related expenses during 2020 would be as follows:
Travel Costs (Hotel And Airline Costs) $18,000
Travel Costs (Meals) 8,500
Advertising And Promotion 23,000
2. She would use the car throughout 2020.  She expects to drive this vehicle a total of 53,000
kilometers during 2020, with 37,000 of these kilometers required by her employment
activities.
3. The offer includes a group disability insurance plan for which the company will pay all of the
premiums.  The plan provides periodic benefits that compensate for lost employment
income.  This will cost the employer $4,500 per year.
4. The offer includes a $1,000,000 face value life insurance policy.  All of the premiums, which
will total $3,800 per year, will be paid by the employer.
5. Assume that the prescribed rate is 2 percent throughout 2020.  

Required:
Based on the estimates made by Ms. Arden, calculate Ms. Arden’s minimum 2020 net
employment income for the offer.  Ignore PST and GST considerations.
Prepare a list of the items that were not used in the calculation of net employment income.
Taxation – Assignment #1
Winter 2021

Question 4
Steve Martin is employed by a Canadian public company in Toronto and lives downtown.
During 2020, he has a base salary of $185,000.  In addition to his salary, he earns commission
of $22,310.  Additional information relevant to Curt’s 2020 employment income is as follows:
1. Steve is a member of his employer’s registered pension plan.  During 2020, $3,750 was
withheld from his salary as a contribution to this plan.  His employer made a matching
contribution of $3,750.
2. For his employment related travel, Steve drives a car that he purchased on January 1, 2020
for $38,000.  During 2020, he drives 45,000 kilometers, of which 38,000 are employment
related.  Curt had financed the car with a loan from a local bank and, during 2020, he had
paid interest of $2,300.
The costs of operating the car during 2020 were $12,420.  He has been advised by his
accountant that, if the car were used 100 percent for employment related activities, the
maximum CCA for 2020 would be $4,500.
3. Steve’s employer requires him to pay all of his employment related expenses, as well as
provide his own office space.  Curt has the required Form T2200 from his employer.
4. During 2020, he pays dues to his professional association of $375.
5. His employer has a policy of giving all employees gifts to promote employee loyalty and help
local businesses.  During 2020, Steve received the following gifts:
 A weekend for him and his wife at a local hotel.  The value of this gift was $375.
 A $200 gift certificate at a local hardware store.
 A basket of fruit, nuts, and cheeses, with a value of $175.
6. Steve uses 25 percent of his personal residence as an office. During 2020, the costs
associated with his home were as follows:
Interest Payments On Mortgage $ 8,700
Property Taxes 3,850
Utilities 1,875
Insurance 960
Roof Repairs 3,640
Total $19,025

7. Steve’s travel costs for 2020, largely airline tickets, food, and lodging, total $24,600.  This
includes $10,300 spent on meals while traveling for his employer.  This total includes meals
with clients of $2,400.
8. During 2020, Steve was billed a total of $9,600 by his golf club in Toronto.  Of this amount,
$2,250 was the annual membership fee, with the remaining amount for meals and drinks
with clients.  He uses the club only when he is with clients.  

Required: Calculate Steve’s minimum net employment income for the 2020 taxation year.
Ignore GST and PST considerations.
Prepare a list of the items that were not used in the calculation of net employment income.
Taxation – Assignment #1
Winter 2021
Taxation – Assignment #1
Winter 2021

Question 5

There are seven independent cases which follow. Each case involves various
assumptions as to the amount and type of income earned by John Moss during 2020, as
well as to other information that is relevant to the determination of his 2020 Tax
Payable. John's Net Income For Tax Purposes is equal to his Taxable Income in all
Cases.

In those cases where we have assumed that the income was from employment, the
employer withheld the maximum EI premium and CPP contribution.

Case 1 — John is 58 years old and has employment income of $88,600. His common-law
partner is 48 years old and has income of $8,260. They have an adopted child who is 19
years old and lives at home. John and his partner have medical expenses of $4,600.
Medical expenses for the son total $10,300. The son has Net Income For Tax Purposes of
$4,300.

Case 2 —John is 46 years old and has employment income of $165,000. His wife Mary is
41 years old and has Net Income For Tax Purposes of $6,100. They have a 20 year old
son who lives at home. He is dependent because of a physical infirmity, but it is not
severe enough to qualify him for the disability tax credit. However, he is able to attend
university on a full time basis for 8 months during 2020. John pays his tuition fees of
$9,400, as well as $720 for the textbooks that he requires in his program. The son has
Net Income For Tax Purposes of $8,350. The son agrees to transfer the maximum of his
tuition fee amount to John.

Case 3 —John is 31 years old, has employment income of $88,000, and makes
contributions of $3,000 to registered charities. He is not married and has no dependants.

Case 4 —John is 43 years old and has net rental income of $99,300. His wife died last
year and he is a single parent of two children. Mack is 16 and is physically infirm, but
does not qualify for the disability tax credit. He has income from part time work as a
student counselor of $4,800. His daughter, Serena, is 10 and is in good health.

Required: In each Case, calculate the minimum 2020 federal Tax Payable for John Moss.
Indicate any carry forwards available to him and his dependants and the carry forward
provisions. Ignore any amounts John might have had withheld for taxes or paid in tax
instalments and the possibility of pension splitting.
Taxation – Assignment #1
Winter 2021