Solution to P3-5

While the company lost $11,000 during the year, the calculation of income for tax
purposes is considerably different. There are two reasons for this. First, the gain and loss
on the sales of public corporation shares are capital gains and only 1/2 of the actual
amounts are applicable for tax purposes.
Second, in accordance with the aggregating formula, the capital loss on sale #2 can only
be deducted to the extent of taxable capital gains earned in the year. This treatment is
different from other types of losses (like the loss on real estate rentals) which can be
offset against all other sources of income [ITA 3].
The tax calculation is as follows:
3(a) Business income $181,000

3(b) Taxable capital gain (1/2 of $7,000) $ 3,500

Allowable capital loss (1/2 of $177,000) (88,500) 0
181,000
3(c) Other deductions 0
181,000
3(d) Loss from real estate rentals (22,000)

Net Income and Taxable income $159,000

Tax payable (13% x $159,000) $ 20,670

Solution to Case - Bendana Corporation

• Bendana Corporation is a resident of Canada because it was incorporated in Canada

[ITA 250(4)] and, therefore, taxable on its world income [ITA 2(1), 3(a)].
• Holdings Limited is not resident because it is a U.K. corporation.
• Dividends, if any, paid from Bendana to Holdings are subject to Canadian withholding
tax [ITA 212(2)].
• Expansion to U.S.:
o Office in Chicago: income is part of Bendana's world income and taxed in
Canada. The income may also be taxed in the U.S. but receives a foreign tax
credit in Canada [ITA 3(a), 126(2)].
o Purchase of U.S. Corp.: U.S. Corp. is not resident of Canada and its income is
not taxed in Canada [ITA 2(3)]. Dividends paid to Canada may be subject to
U.S. withholding tax.

Landry Peters:

• Makes a clean break either in October or December 2020 depending on how much
weight is put on the fact that the spouse is remaining in Canada a short time.
• Taxed on world income to date of departure [ITA 2(1), 114].
• Dividends from the private corporation will be subject to Canadian withholding tax after
departure [ITA 212(2)].
• On departure, Landry is deemed to have sold his private corporation shares at fair
market value and to reacquire them at that same amount [ITA 128.1(4)(b), (c)]. (See
Chapter 8). When the shares are sold in 2021, when Landry is a non-resident, the
 gain will not be taxable in Canada since the private corporation shares are not taxable
Canadian property, assuming the value of the private company shares is not derived
principally from real estate located in Canada [ITA 248(1)].
• Interest of 12% on deferred payments from the sale proceeds on the shares is subject
to Canadian withholding tax since the interest is being paid to a related person (brother)
[ITA 212(1)(b)].

Mrs. Peters:

• Receives rental income after departure on her house that is subject to a withholding
tax [ITA 212(1)(d)].
• The house is exempt from the deemed disposition rules on departure [ITA
128.1(4)(b)(i)].

Eliana Thompson:

• 2020 - Not a permanent resident (no continuing ties). Therefore, as a non-resident

employed in Canada in 2020 she is taxed on employment income earned in Canada
[ITA 2(3)].
• 2021 - Present in Canada for more than 182 days and is, therefore, deemed resident
[ITA 250(1)(a)] and taxed on world income (including investment income from U.K.)
[ITA 2(1), 3(a)].

Remi Watkins:

• Doesn't appear to have made a clean break (plans to return). Therefore, she
continues to be resident and, therefore, subject to tax on her world income [ITA
2(1), 3(a)].

Solution to P4-7

The revised net income for tax purposes is:

Employment:
Salary [ITA 5(1)] $92,000
Stock option benefit [ITA 7(1)]:
value at purchase date ($22 x 1,000) $22,000
option purchase price ($16 x 1,000) 16,000 6,000
98,000
Deductions from employment income:
Pension contribution [ITA 8(1)(m)] (4,400)
Office supplies [ITA (8(1)(i))] (410)
93,190
 Capital gain (Remco shares) [ITA 40(1)]:
Proceeds ($24 x 1,000) $24,000
Adjusted cost base ($22 x 1,000) (22,000)
Capital gain $ 2,000
Taxable gain ($2,000 x ½) [ITA 38] 1,000
Net income $94,190

Summary of changes:

1. The bonus was excluded - it was not received in 2020. Employment income is taxed on a cash
basis, therefore the bonus is included in employment income in 20X2, the year received [ITA
5(1)].

2. The capital gain on the stock option shares should be calculated as the excess of the proceeds
over the value of the shares at the time they were acquired [ITA 53(1)(j)]. The excess of the
value at the acquisition date over the purchase price is employment income [ITA 7(1.1)].
Because the option price was not less than the share value at the date the option was granted,
a stock option deduction of $3,000 (½ x $6,000 employment benefit) can be claimed when
arriving at taxable income [ITA 110(1)(d)].

2. The home office expenses (repairs of $340 and utilities of $120) were excluded because Riley
does not meet either of the two tests in ITA 8(13) –

a) the home office is not the place where he principally performs his duties of employment.
(He is required to work from his home from time to time.)

b) the office was not used exclusively for employment purposes and was not used on a regular
basis for meeting customers or other persons in carrying out his duties of employment.

4. The cost of meals incurred as a travel expense ($300) was excluded because the daily trips
were less than 12 hours [ITA 8(4)].

5. The computer software ($220) was excluded because there is no provision in section 8 for
such a deduction. It is also a capital item. ITA 8(1)(j) & (p) permit an employee a CCA deduction
only on a car, an airplane and a musical instrument.

Solution to P4-12

(a) Employment income 2020:

ITA 5(1) Salary $ 90,000

ITA 5(1) Commission received 6,000
ITA 6(1)(b) Clothing allowance 1,500
ITA 6(1)(a) Contribution to RRSP 13,000
ITA 5(1)(a) Payroll advance 3,000
ITA 6(1)(a) Financial planning 400
ITA 6(1)(a), 6(20) Reimbursement for loss from
sale of house – 1/2 ($20,000 - $15,000) = 2,500
116,400
Employment deductions:
ITA 8(1)(i) Cell phone air time (1,200)
ITA 8(1)(f) Salesperson expenses:
 Travel $3,000
Auto operating - 60% x $3,800 2,280
Parking 100
5,380
Meals and drinks - 50% x $1,600 800
Golf club dues - not permitted 0
Cell phone - capital item 0
$6,180
Limited to commission income (6,000)
ITA 8(1)(j) Auto capital costs:
Interest (limit $300/month) $2,200
CCA - Class 10.1 – (see note below)
$33,900 x 45% 15,255
$17,455
Employment usage 60% (10,473)

Net employment income $ 98,727

Notes:

• Cell phone – the cost of employment related cell phone calls is deductible (airtime
consumed). As well, CRA policy with respect to fixed monthly plans is that the percentage
of the airtime expenses for a cellular telephone that reasonably relates to earning
employment income is deductible [ITA 8(1)(i); T4130].

• The capital cost of Class 10.1 cars is limited to $30,000 plus tax [ITA 13(7)(g)]. The HST
rate is given as 13%. The limit is $30,000 x 1.13 = $33,900.

• The following items were excluded:

• Mental health benefit for son is not a taxable benefit.

• Reimbursement for moving expenses are not taxable but employee must reduce
actual moving cost when claiming moving deduction under other deductions in the
aggregating formula in ITA 3.
 • Costs to acquire clothing are not a permitted deduction under 8(1)(f) as they are a
personal item.
• Malia has the option of deducting travel and car expenses under ITA 8(1)(h) & (h.1)
which have no limit. If she does this she is denied any deduction under ITA 8(1)(f). In
this case, Malia is better claiming the deduction under ITA 8(1)(f).

2. Malia will have to include in employment income an imputed interest benefit equal to the
difference between the CRA prescribed interest rate on the loan and the 2% interest paid
(assuming the interest is paid by 30 days after the end of the year) [ITA 80.4(1)]. The
imputed interest benefit is deemed “interest paid” by Malia [ITA 80.5]. Thus, the
employment benefit as well as the 2% interest actually paid can be deducted as an expense
when calculating property income [ITA 20(1)(c)].

Solution to Case ONE – Daniel Hudson

Part (1) Employment income - Current employer:

Salary [ITA 5(1)] $80,000

Deduct:
Auto travel costs [ITA 8(1)(h.1)]
Lease $6,000
Insurance 800
Repairs 600
Gasoline 2,200
$9,600
Employment portion 4,000/22,000 x $9,600 (1,745)
Meals out of town (50% x $200) [ITA 8(1)(h), 8(4), 67.1] (100)

$78,155

Note: There is no deduction for the tradesperson’s tools as the cost of the tools was not in excess
of $1,245 (2020) in the year [ITA 8(1)(s)]. Clothing costs are not deductible under ITA 8(1)(i)
because they are not consumed.

Part (2) Employment income - New offer:

Salary [ITA 5(1)] $70,000

Auto standby charge ([$450 x 12] x 2/3) [ITA 6(1)(e), 6(2)] 3,600
Auto Operating expense benefit 18,000 km x 28¢ [ITA 5,040
6(1)(k)]
Low interest loan [ITA 6(9), 80.4(1)]
Prescribed rate (4% x $40,000) $1,600
Less actual interest (1% x $40,000) (400) 1,200
Life insurance [ITA 6(1)(a), 6(4)] 900
Club dues [ITA 6(1)(a), IT-470R] 2,400

$83,140
Note: If the low interest loan is used to assist with the purchase of the home, ITA 80.4(4) will limit
the prescribed rate used to calculate the taxable benefit to 4%, the rate in effect when the loan
was made to Daniel.

Solution to Case ONE – Daniel Hudson

Part (1) Employment income - Current employer:

Salary [ITA 5(1)] $80,000

Deduct:
Auto travel costs [ITA 8(1)(h.1)]
Lease $6,000
Insurance 800
Repairs 600
Gasoline 2,200
$9,600
Employment portion 4,000/22,000 x $9,600 (1,745)
Meals out of town (50% x $200) [ITA 8(1)(h), 8(4), 67.1] (100)

$78,155

Note: There is no deduction for the tradesperson’s tools as the cost of the tools was not in excess
of $1,245 (2020) in the year [ITA 8(1)(s)]. Clothing costs are not deductible under ITA 8(1)(i)
because they are not consumed.

Part (2) Employment income - New offer:

Salary [ITA 5(1)] $70,000

Auto standby charge ([$450 x 12] x 2/3) [ITA 6(1)(e), 6(2)] 3,600
Auto Operating expense benefit 18,000 km x 28¢ [ITA 5,040
6(1)(k)]
Low interest loan [ITA 6(9), 80.4(1)]
Prescribed rate (4% x $40,000) $1,600
Less actual interest (1% x $40,000) (400) 1,200
Life insurance [ITA 6(1)(a), 6(4)] 900
Club dues [ITA 6(1)(a), IT-470R] 2,400

$83,140
Note: If the low interest loan is used to assist with the purchase of the home, ITA 80.4(4) will limit
the prescribed rate used to calculate the taxable benefit to 4%, the rate in effect when the loan
was made to Daniel.
Solution to P 10-6

a. Income for tax purposes and taxable income

ITA 3(a) Employment income $ 74,701

Business income 167,525
Property income 2,254
Other income 3,000
247,480
ITA 3(b) Taxable capital gains 2,141
249,621
ITA 3(c) Other deductions (10,666)
238,955
ITA 3(d) Losses & ABILs (0)

Net income 238,955

Deduct:
Capital gain deduction [ITA 110.6] (2,000)
Stock option deduction [ITA 110(1)(d.1)] (500)

Taxable income $236,455

Employment income

Salary [ITA 5(1)] $70,000

Group term life insurance premium [ITA 6(1)(a), 6(4)] 800
Standby charge – (2% x $32,000 x 6mo) x 4,000km/(1,667km x 6mo) 1,536
[ITA 6(1)(e), 6(2)]
Operating expense benefit - least of: [ITA 6(1)(k)]
28¢ x 4,000 km = $1,120; 1/2 x $1,536 (standby charge) = $768 768
Frequent flyer points 0
Employee loan [ITA 6(9), 80.4(1)] -
ITA 80.4(1)(a) $60,000 x 3% x 182/366 = $895
ITA 80.4(1)(c) $60,000 x 1% x 182/366 = (298) 597
Stock option benefit - 500 shares x ($12 - $10) [ITA 7(1.1)] 1,000
$74,701
Business income

Income per financial statement [ITA 9(1)] $164,000

Amortization [ITA 18(1)(b)] 9,100
Club dues [ITA 18(1)(l)] 1,600
Donations [ITA 18(1)(a)] 1,800
Promotion - 50% ($400) [ITA 67.1] 200
Computer software - capital item [ITA 18(1)(b)] 900
CCA (prorated for short taxation year – 184 days
[ITA 20(1)(a), Reg. 1100(1), (2), (3)]
Class 14.1, client list - $50,000 x 5% x 1.5 x 184/365 (1,890)
Class 50 computer - 4,000 x 55% x 1.5 x 184/365 (1,664)
Class 8, library - $5,600 x 20% x 1.5 x 184/365 (847)
Class 10.1, car [Reg. 7307] –
$30,000(limit) x 30% x 1.5 x 184/365 = $6,805
Less personal use portion (40%) (2,722) (4,083)
Class 12, software - $900 x 100% x 184/365 (454)
 Home office - $15,000 (12/80) x 184/366 (1,131) $167,525

Property income

Rental property
Reported income [ITA 9(1)] $600
Add 2019 reserve for unpaid rents [ITA 12(1)(d)] 500
Deduct interest on employee loan - [ITA 20(1)(c), 80.5]
Interest paid $298
Interest deemed paid 597 (895)
205
CCA - 4% x $52,000 = $2,080,
limited to rental income [Reg. 1100(11)] (205)
$ 0
Dividends [ITA 12(1)(j)]
Received from Roadhouse - $1,000 x 115% $1,150
Stock dividend from public co - 100 x $8 = $800 x 138% 1,104 $2,254

Other income

Spousal RRSP withdrawal - $1,000 x 3 years [ITA 146(8.3)] $3,000

Taxable capital gains [ITA 38(a)]

Roadhouse shares - proceeds - 500 x $20 $10,000
ACB - 500 x 12 (6,000)
$ 4,000
Taxable - ½ x $4,000 $ 2,000

TXE shares - proceeds - 100 x $7 $700

ACB –weighted average [ITA 47(1)]
[(2,000 x $4) + (100 x $8)] = $8,800/2,100 shares
$4.19/ share x 100 shares sold (419)
$281
Taxable –1/2 x $281 141 $2,141

Other deductions

CPP enhanced contributions [ITA 60(e.1)] $ (166)

RRSP – [ITA 60(i), 146(5)] least of – $26,500; $10,500; and contributions $12,000 (10,500)
$(10,666)

Note 1
Several items were excluded from the calculation - private medical premiums paid by
employer are not taxable [ITA 6(1)(a)(i)]; frequent-flyer points [Income S2-F3-C2]];
interest on late tax instalment is not deductible [ITA 18(1)(t)]; loss on silver tea set is
deemed to be nil because it is a personal-use property [ITA 40(2)(g)(iii)].
b. Federal income tax [ITA 117(2)]

$214,368 $49,644
33% x 22,087 7,289

$236,455 56,933

Deduct non-refundable tax credits:

ITA 118(1)(c) Basic personal amount $12,298

ITA 118.7 EI & CPP ($3,754 - $166) 3,588
ITA 118(10)] Canada employment credit 1,245
$17,131 x 15% (2,570)
ITA 118.2(1) Medical (dental + insurance
Premiums) ($2,900 + $400) $3,300
Less: lesser of
(3% x $238,955 = $7,169) or $2,397 (2,397)
$ 903 x 15% (135)

ITA 118.1(3) Donations (15% x $200 + 33% x $1,600) (558)

ITA 121 Dividend tax credit - eligible – $800 x 38% x 6/11 (166)
- non-eligible - $1,000 x 15% x 9/13 ) (104)
7
Basic federal tax 53,400

Other tax credit

ITA 127(3) Political contribution (75% x $400) +

(50% x $350) +(33 1/3% x $650) MAX. (650)

Federal tax payable $52,750

c. The convention expenses were not allowed as a deduction in 2018 because, in calculating
employment income, section 8 of the Income Tax Act does not specifically permit the
deduction [ITA 8(2)]. The proposed 2021 convention expense will be allowed because it
will be a deduction in arriving at business income and ITA 20(10) specifically permits the
deduction for two conventions annually.
Solution to P 5-9

The question requires the determination of net income from business. Therefore, other items
such as property income and capital gains, if any, are excluded even though they may be taxable
as part of the corporation's total net income from all sources:

Income per financial statements 2020 [ITA 9(1)] $450,000

1) The opening inventory of a new year must be consistent with the

closing inventory of the previous year ($280,000 - $270,000) [ITA
10(2)]. 10,000

2) Salary to housekeeper is a personal living expense even though it

permitted the spouse to work full-time in the business. [ITA 18(1)(h)] 15,000

3) Compensation bonuses can be deducted on the accrual basis only if

they are paid within 180 days of the taxation year. Therefore, a bonus
of $30,000 payable after one year is not deductible until next year [ITA 30,000
78(4)].

4) Registered Pension plan contributions made by the employer during

the year and within 120 days after the end of the year are deductible
[ITA 20(1)(q); 147.2(1)]. If the RPP is a defined benefit plan, all
contributions are deductible if they are determined by an actuary to be
necessary to fund the plan [147.2(2)]. In the case of a defined
contribution (money purchase) plan, the total of the employer and
employee contributions, combined, for a year for any member of the
plan, cannot exceed 18% of the employee’s compensation for the year,
limited to $27,830 (2020) [147.1(1), (8)].

The $6,000 pension contribution exceeds the 18% of compensation 600

limit for the employee earning $30,000 (18% x $30,000 = $5,400).
Therefore $600 ($6,000 - $5,400) is not deductible.

5) Dues to golf clubs are not deductible, by exception, even though they
are part of the compensation package [ITA 18(1)(l)]. 6,000

6) Interest on deficient tax instalments is not deductible [ITA 18(1)(t)] 1,000

7) Three-year fire insurance must follow accounting principles and

matched to income over three years ($2,000 is deductible in next two 2,000
years) [ITA 18(9)].

8) Life insurance is not for employee compensation and its potential

income is not taxable. Therefore, it is normally not deductible. However,
because it is required for the bank loan, it is a cost incurred to borrow
money. Normally, these types of costs, by exception to the general rule,
can be deducted over five years at 1/5 per year. However, because the
insurance is a recurring annual amount it is fully deductible [ITA 0
20(1)(e.2)].
 9) Appraisal cost for corporate share valuation is on account of capital.
Also, it was incurred for the personal benefit of the shareholder and not
to earn income [ITA 18(1)(b)&(h)] 2,500

10) Cost of amending articles of incorporation is a capital item [ITA

18(1)(b)]. The cost will be added to Class 14.1 for CCA purposes. 1,000

11) Cost of issuing new class of shares and debentures normally is not
deductible because it is a capital item. However, by exception, it can
be deducted over five years at 1/5 per year. Therefore, 4/5 of $3,000
is not deductible this year [ITA 20(1)(e)]. 2,400

12) Cost of sales tax reform submission is specifically permitted as a

deduction as a cost of representation [ITA 20(1)(cc)]. 0

13) Engine replacement for truck is a capital item because it extends the
normal useful life of the asset [ITA 18(1)(b)]. It qualifies for capital
cost allowance on trucks [ITA 20(1)(a)]. 5,000

14) Meals and beverages are restricted to 50% of the actual cost.
Therefore, increase income by 50% of $3,000 [ITA 67.1]. 1,500

15) Meal and beverage costs for employees entertaining customers are
limited to 50% of actual cost (50% of $4,000) [ITA 67.1]. 2,000

16) An increase in the reserve for doubtful accounts receivable is

deductible provided it is a reasonable amount in respect of doubtful
debts that have been included in computing income. 0

17) Reserve for sales returns of 1% of sales is not deductible due to

general reserve limitation [ITA 18(1)(e)]. However, the actual cost of 17,000
returns is deductible for the year. (12,000)

18) Depreciation/amortization is disallowed by the general limitation

[18(1)(b)] 16,000
But related capital cost allowance is permitted [ITA 20(1)(a)] (19,000)

19) Loss on sale of securities is a capital loss and is not part of net
income from business [ITA 18(1)(b)]. However, 1/2 of $6,000 is
relevant for computation of net taxable capital gains [ITA 38] 6,000

20) Net gains on sales of land (book gain) (40,000)

The gain of $60,000 on head office site is a capital gain and not part
of business income [ITA 18(1)(b)].
Property 2 was purchased to trade at a profit. The loss of $20,000 is,
therefore, a business loss and remains fully deductible (see below).
21) Interest income on government bond is property income and should
be excluded from business income. (10,000)

22) Donations are not for the purpose of earning income [ITA 18(1)(a)]. 4,000

Net income from business $491,000

 Business loss – sale of property 2 $(20,000)

Overall, net income for tax purposes of the corporation is as follows:

3 (a) Net income from business $491,000

Property income (interest) 10,000
501,000
3 (b) Taxable capital gains (land) (1/2 of $60,000) $30,000
less allowable capital loss (securities) (1/2 of (3,000) 27,000
$6,000)
528,000
3 (c) Other deductions 0
528,000
3 (d) Losses – Business (20,000)

Net income for tax purposes $508,000

Solution to P 6-10

Analysis of Depreciable Property:

Class: 1 (6%) 8 (20%) 10 (30%) 44 (25%)

Opening balance $ 80,000 $32,000 $50,000 0

Additions (patent) $20,000
Disposals (100,000) (8,000) 0 0
(20,000) 24,000 50,000 20,000
2020 CCA (4,800) (15,000) (7,500)*
2020 Recapture 20,000 . . .

0 $19,200 $35,000 $12,500

* Note: $20,000 x 25% x 1.5 = $7,500. The taxpayer can elect to treat the patent as Class 14
with CCA on a straight line basis (10 years), (or some other reasonable amount based on
economic value). In this case, Class 44 provides a faster write off.

Class: 14.1 (5%)

Opening balance 48,750

Additions: Reorganization of share capital 8,000
Disposal: Franchise (8,000)
48,750
2020 CCA (2,438)

$46,312
 Buckwold, Kitunen and Roman, Canadian Income Taxation, 2020-2021 Ed.

Business income for tax purposes:

Income from business:

Income per financial statement [ITA 9(1)] $120,000
Add: Donations [ITA 18(1)(a)] 3,000
Legal fees - reorganization of share capital [ITA 18(1)(b)] 8,000
Amortization (tangible assets) [ITA 18(1)(b)] 12,000
Amortization (intangible assets) [ITA 18(1)(b)] 9,000
Accounting loss on sale of franchise [ITA 18(1)(b)] 1,000
Recapture of capital cost allowance [ITA 13(1)] 20,000
173,000
Deduct:
Capital cost allowance (4,800 + 15,000 + 7,500+ 2,438) (29,738)
Accounting gain on sale of - land (10,000)
- building (40,000)
- equipment (2,000)

Net income from business $ 91,262

Solution to P 6-9

Part (a) UCC at end of 2019

The company has a short year end and the CCA must be reduced accordingly [Reg. 1100(3)].

CLASS 53
UCC
Cost $320,000
CCA $320,000 x 50% x 2 x 184/365 = (161,315) $158,685

CLASS 14
Franchise #1 $40,000
CCA 92 days/3,650 days x $40,000 x 1.5 (1,512) $38,488

The short taxation year rules are not applicable to Class 14 [Reg. 1100(3)].

CLASS 14.1
Legal fees for incorporation ($4,000 - $3,000 deductible portion) $ 1,000
Franchise #2 80,000
81,000
CCA $81,000 x 5% x 1.5 x 184/365 = (3,062) $77,938

CLASS 12
Cutlery $115,000
Other software for computer 3,000
118,000
CCA: Cutlery $115,000 x 100% x 184/365 $(57,973)
Software $3,000 x 100% x 184/365 (1,512) (59,485) $58,515

CLASS 1
Building $220,000
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 Buckwold, Kitunen and Roman, Canadian Income Taxation, 2020-2021 Ed.

CCA $220,000 x 6% x 1.5 x 184/365 (9,981) $210,019

An additional allowance of 2% (increasing the rate to 6%) is available for new buildings acquired
after March 18, 2007 where more than 90% of the floor space is used at the end of the year for a
non-residential use [Reg. 1100(1)(a.2)]. To receive the additional allowance the building must be
placed in a separate CCA class [Reg. 1101(5b.1)]. The building does not qualify for the 10% CCA
rate since it is unlikely that greater than 90% of the floor space of the restaurant is used for
processing of food.

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Instructor Solutions Manual Chapter Six
 Buckwold, Kitunen and Roman, Canadian Income Taxation, 2020-2021 Ed.

Part (b) Business income for 2020

Income per financial statement [ITA 9(1)] $128,000

Add:
Amortization [ITA 18(1)(b)] 102,000
Unpaid remuneration - two bonus payments are paid later than
179 days after the year end. ($4,000 + $4,000) [ITA 78(4)] 8,000
Recapture of CCA (note 1) [ITA 13(1)] 9,981

Donations [ITA 18(1)(a)] 2,000

Net losses on sale of fixed assets [ITA 18(1)(b)] 22,000
271,981
Deduct:
Gain on sale of goodwill (60,000)
CCA (note 2) [ITA 20(1)(a)] (99,755)

Business income for tax purposes $112,226

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 Buckwold, Kitunen and Roman, Canadian Income Taxation, 2020-2021 Ed.

Note 1:
Class 1 - UCC opening $210,019
Proceeds (limit to cost) (220,000)
Recapture $ (9,981)

Taxable capital gains (have not been

included in business income):
Building ($230,000 - $220,000) x ½ $ 5,000
Land ($15,000 - $12,000) x ½ 1,500
Goodwill ($60,000 - $0) x ½ 30,000
$36,500

Note 2:
Capital cost allowance:
Class 53 - UCC beginning of the year $158,685
Disposal (40,000)
118,685
CCA (50% x $118,685) (59,343) $(59,343)
$ 59,342

Class 14 - $40,000 x 365/3,650 (4,000)

Class 14.1 - UCC beginning of the year $77,938

Proceeds for Goodwill (limited to cost) (0)
77,938
CCA @ 5% (3,897 (3,897)
$74,041)

Class 12 - UCC $ 58,515

Disposal (26,000)
32,515
CCA 100% (32,515) (32,515)
$ 0
$99,755

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Solution to P 7-7

Net income for tax purposes for Newgardens Ltd. (2020):

Net income per financial statements [ITA 9(1)] $351,000

Donations [ITA 18(1)(a)] 8,000
Accounting Gain on sale of land (Stoney Lake) [ITA 18(1)(b)] (170,000)
Sale of subdivided land is business income:
Gain (300,000 - 130,000) $170,000
Reserve 250,000/300,000 x 170,000 [ITA 20(1)(n)] (141,667) 28,333
Share of profits of Rare Products Ltd.
- separate corporation (120,000)
Dividend from Rare [ITA 12(1)(j)] 25,000
Share of partnership profit [ITA 12(1)(l)]
(80,000 x 40%) - dividend income 32,000
(120,000 x 40%) - royalty income 48,000
Interest on GIC (9,000 x 3/12) [ITA 12(1)(c)] 2,250
Additional dividend on US shares [ITA 12(1)(k)]
- foreign tax withheld 2,000
Stock dividend (100 @ $30) [ITA 248(1)] 3,000
Rental loss (accounting loss) 19,000
(tax loss) (see note 1 below) 0
Taxable capital gain on Townhouse #1:
land and building (75,000 – 60,000)½ 7,500
Net income for tax purposes $236,083

Note 1 - Rental properties:

Rental loss reported $(19,000)
Landscaping included in capital costs [ITA 20(1)(aa)] (8,000)
Cost of surveying land (add to land cost) [ITA 18(1)(b)] 2,400
Amortization [ITA 18(1)(b)] 28,000
Cost of financing mortgage (legal) [ITA 20(1)(e)]
(1/5 deductible annually) 4/5 x 2,000 1,600
Income before CCA 5,000
CCA limited to net rental income [Reg.1100(11)] (5,000)
Rental income $0

CCA Schedule:
Class 1 1 1
2019 $150,000 $40,000
2019 CCA @ 4% x 1.5 (9,000) (2,400)
141,000 37,600
2020 Purchase Townhouse #2 39,000
2020 Constructed simplex *349,000
2020 Sale: townhouse #1 . (40,000) .
141,000 36,600 *349,000
2020 Maximum CCA (4%)* (5,640) (1,464) (20,940)

* Cost includes labour and materials of $300,000 plus the cost of air conditioning and heating
equipment. CCA is - $349,000 x 4% x 1.5 = $20,940. Residential properties are not eligible
for the 6% CCA rate.
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Note that where costs of surveying land are incurred as part of the investigation of a site to
determine whether the land is physically suited for the planned building and the building is
intended for use in a business carried on by the taxpayer, the surveying costs are deductible
in the year paid [ITA 20(1)(dd); IT-350R].

Net income for tax purposes:

The property income is as follows:

Net income for tax purposes $236,083

Deduct:
Business income - land sale (28,333)
Taxable capital gain (7,500)

Property income $200,250

The breakdown of net income for tax purposes is:

Business income:
Land sale $ 28,333
Property income:
Above 200,250
7,500
Taxable capital gain

$236,083
Solution to P 8-7

Part (a) Net Income for Tax Purposes 2020:

3(a) Employment income – director’s fee [ITA 6(1)(c)] $ 6,000

Business income - sale of licenses 24,000
Property income:
Interest [ITA 12(1)(c), 12(4)] 20,000
Foreign dividends ($2,700 + $300) [ITA 12(1)(k)] 3,000
Rental income:
Loss from rentals $(3,000)
Recapture of CCA ($50,000 - $61,000) [ITA 13(1)] 11,000 8,000

61,000
3(b) Taxable capital gains:

Public corporation shares sold - ½($8,000) $ 4,000

Public corporation shares gifted to son - ½($10,000 -
$8,000) [ITA 69(1)(b)] 1,000
Land - ½($12,000 - $9,000) 1,500
Building - ½($88,000 - $61,000) 13,500
20,000
Taxable Net gain from Listed Personal Property:
½($4,000 painting - $5,000 jewelry) [ITA 41(1)] 0
20,000

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Allowable capital loss:

Sale of land - ½($38,000) (19,000) 1,000
62,000
3(c) Other deductions*
(80)
61,920
3(d) Losses:
Business Loss from retail store $7,000
Allowable business investment loss
- sale of small business corporation [ITA 39(1)(c)]
shares - ½($10,000) 5,000 (12,000)

Net income for tax purposes $49,920

• CPP enhanced contributions (5.25% - 4.95%) x ($6,000 +

$24,000 - $3,500) = $80.

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Part (b)

The purchase of a new rental property in 2021 will have no effect on the 2020 income for tax
purposes. If the land and building sold in 2020 had been used to carry on a business rather than
earn property income, the capital gain and recapture of CCA realized in 2020 could have been
deferred if a replacement property was acquired within 12 months after the end of the 2020
taxation year [ITA 44(1)]. This opportunity is not available for rental properties [ITA 44(5)].

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Solution to P 8-11

(a) In order to make a numerical comparison, an assumption must be made for the ultimate
disposition date of the investment. Because the question provides information for five years,
this time frame is assumed.

If Jordana keeps the Cory shares, after five years she will have:

$50,000 x 10% x 5 years = $80,525

Less tax on sale after year 5,
45% x 1/2($80,525-$20,000) (13,618)

$66,907

If she sells Cory and buys J2 shares, after five years she will have:

Sale of Cory in the current year $50,000

Tax 45% x ½ ($50,000-$20,000) (6,750)

Cash for J2 investment $43,250

Value of J2 investment:
After 5 years $43,250 x 13% x 5 years $79,685
Less tax on sale after 5 years
45% x 1/2 ($79,685-$43,250) (8,198)

$71,487

Assuming Jordana will dispose of her investment after 5 years, she should sell the Cory
shares and purchase J2 shares as her after-tax proceeds are $71,487 versus $66,907.

The decision is more difficult if she will not dispose of her investment after five years.

(b) Rate of return required on the J2 shares to justify a sale of the Cory shares:

The J2 shares must earn a sufficient return to provide at least $66,907 after-tax at the end
of five years on an investment of only $43,250.

Therefore the selling price after five years must be:

Selling price - tax = $66,907

Selling price - .45(1/2) (selling price - $43,250) = $66,907
Selling price = $73,775

The pre-tax return on $43,250 to yield $73,775 after 5 years is = 11.27%

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