Self Study and SSS Problems For Chapters 1 To 10 Volume 1 Page 1

Self Study And SSS Problems For Chapters 1 to 10 Volume 1 Page 1
Self Study And SSS Problems For Chapters 1 to 10
To provide practice in problem solving, these are the Self Study Problems for Volume 1,
which includes Chapters 1 to 10. The detailed solutions to these problems are
available in both the print and online Study Guide.
For additional practice in problem solving, there are Supplementary Self Study
Problems with detailed solutions available for each chapter. These problems and
solutions are available in this file after the Self Study problems for each Chapter.
Canadian Tax Principles - Self Study And SSS Problems (2020/2021)

Chapter 1 Self Study Problems Volume 1 Page 2
Self Study Problem One - 3
Chapter 1 Self Study Problems

(Regressive Taxation)
A regressive tax can be described as one that is assessed at a lower rate as income levels
increase. Despite the fact that the harmonized sales tax (HST) is based on a single rate, it is
referred to as a regressive form of taxation.
Required: Explain how a tax system with a single rate can be viewed as regressive.
SOLUTION available in Study Guide

(Flat Rate Tax)
At a recent cocktail party, Mr. Right was heard complaining vehemently about the lack of prog-
ress towards tax simplification. He was tired of spending half of his time filling out various CRA
forms and, if the matter were left to him, he could solve the problem in 10 minutes. “It is simply
a matter of having one tax rate and applying that rate to 100 percent of income.”
Required: Discuss Mr. Right’s proposed flat rate tax system.

(Qualitative Characteristics)
In recent years, the government has introduced a number of changes in tax legislation related to
individuals. A selected group of these measures can be described as follows:
Lifetime Capital Gains Deduction There is a provision to remove from Taxable
Income, capital gains on the disposition of a qualified farming or fishing property. The
limit was increased to $1,000,000. This is higher than the limit for shares of a qualified
small business corporation.
Home Accessibility Tax Credit A credit against Tax Payable equal to 15 percent of up
to $10,000 in expenditures made by seniors and disabled people to gain access to, be
more mobile within, or reduce the risk of harm within their home.
Increase In Tax Free Savings Account (TFSA) Limits The TFSA provision allows non-
deductible contributions to be made to a registered account where earnings accumulate
on a tax free basis. Withdrawals from these accounts are not taxed. The annual limit on
contributions to TFSAs was increased from $5,500 to $10,000 for 2015. This increase
was reversed in 2016.
Required: Analyze each of the described changes using two of the qualitative characteristics of
tax systems that are listed in your text. For your convenience, the list of qualitative characteristics
presented in the text is as follows:

Self-Study Problem One - 5
• equity or fairness
• neutrality
• adequacy
• elasticity
• flexibility
• simplicity and ease of compliance
• certainty
• balance between sectors
• international competitiveness

(Sources Of Tax Information)
The principal source of Canadian income tax information is the Income Tax Act. There are, how-
ever, other sources that are of considerable significance in the application of these rules.
Required: List and briefly describe these other sources of information on Canadian income
tax matters.

(Finding your way around the ITA)
In which subdivision of Division B of Part 1 of the Income Tax Act are the following situations
likely to be found?
(a) You spent $15,000 to landscape around the building in which your business is carried on.
(b) Someone told you that you could only deduct 50% of any business related meals.
(c) You became a member of a partnership this year and want to contribute some land you own
to it.
(d) Your employer advises you that you now qualify for the company stock option plan.
(e) Your spouse was unemployed and received employment insurance payments.
(f) One of your parents passed away and you have been named as the executor.
(g) Your employer provides you with a company owned car for you to use in your employment duties.
(h) You sold the home you have lived in for the last 10 years and purchased another one.
(i) You were audited by the CRA. It cost you $2,000 to have advisors represent you in dealing
with the CRA. You wonder if you can deduct the fees.
(j) You purchased some shares of a major Canadian public company last year and made money
selling them this year. You also received dividends from the company earlier this same year.
(k) Your parents created a family trust years ago and named you a beneficiary. You received a
cheque from the trust this year for your part of the trust income.
(l) You own shares in a family operated company. The company redeemed half of your shares
this year.
(m) You paid $4,500 in child care expenses this year for your four-year-old daughter.
(n) You received $6,000 in Canada Child Benefit payments from the federal government.
(o) A family friend asked for your help. She had lost her job after 10 years of service but had
been given a large cheque in recognition of those years of service.


(Residential Ties)
Paul Brossard accepts an offer to move to the U.S. from Canada to become a manager for a
revitalized Black Hills Gold Savings and Loan branch in South Dakota. Paul has resigned from his
Canadian federal government position, and severed his professional association ties. Further,
he purchased a home in South Dakota. However, his daughter is nearing completion of an elite
French immersion secondary school program in Ottawa, so Paul’s wife and daughter intend to
remain in Canada for two years. They continue to live in the family home in Ottawa.
After six months in South Dakota, the Savings and Loan branch closed. Paul then sold the U.S.
home and moved back to Canada.
Required: Assess whether or not Paul became a non-resident of Canada and if Paul will be
taxed in Canada for the period during which he was living and working in the U.S.

(Part Year Residency Of Individuals)
The following facts relate to three individuals who spent a part of the current year in Canada:
Mr. Aiken Mr. Aiken is a businessman and a U.S. citizen who moved to Canada and
established residence in the middle of June. After the move, he spent the remaining
192 days of the year in Canada.
Mr. Baker Mr. Baker is a businessman and a Canadian citizen who moved out of
Canada in the middle of July and established residence in the U.S. Prior to his move, he
spent the preceding 192 days of the year in Canada.
Mr. Chase Mr. Chase is a professional athlete and a U.S. citizen. His residence is
located in Nashville, Tennessee, and during most of the year his wife and children live
in that city. Mr. Chase plays for a Canadian team and, during the current year, his work
required him to be in Canada for a total of 192 days.
Required: All of the preceding individuals were in Canada for a total of 192 days. Explain their
residence status for income tax purposes in the current year and their liability for Canadian
income taxes.

(Residency Of Individuals)
Determine whether the following persons are Canadian residents for the current year. Explain
the basis for your conclusion. Ignore any possible implications related to tax treaties.
A. Jane Smith was born in Washington, D.C., where her father has been a Canadian ambassador
for 15 years. She is 12 years old, has no income of her own, and has never been to Canada.
B. Marvin Black lives in Detroit, Michigan. He works on a full-time basis throughout the year in
Windsor, Ontario.
C. John Leather was born in Canada and, until September 12 of the current year, he has never
been outside of the country. On this date, he departed from Canada and established a home
in Savannah, Georgia.

D. Francine Donaire is a citizen of France and is married to a member of the Canadian Armed
Forces stationed in France. She has been in Canada only on brief visits since she and her hus-
band have been married, and had never visited the country prior to that time. She is exempt
from French taxation because she is the spouse of a member of the Canadian Armed Forces.
E. Robert Green lived most of his life in Texas. In January of the current year, he moved to
Edmonton to take a high paying job with a local oil exploration company. As he found the
weather to be too cold in Edmonton, he resigned during September and returned to Texas
before having to suffer through another winter.
F. Susan Allen is a Canadian citizen who has lived in New York City for the past seven years.

(Residency Of Corporations)
Determine whether the following corporations are Canadian residents for the current year.
Explain the basis for your conclusion.
A. AMT Ltd. was incorporated in New Brunswick in 1964. Until 1995, all of the directors’ meet-
ings were held in that province. However, since that time, the directors have met on a regu-
lar basis in Portland, Maine.
B. UIF Inc. was incorporated in the state of Montana in 1968. However, until four years ago
all of the directors’ meetings were held in Vancouver, British Columbia. Four years ago, the
president of the company moved to Helena, Montana, and since that time all of the direc-
tors’ meetings have been held in that city.
C. BDT Ltd. was incorporated in Alberta in 1997. However, it is managed in North Dakota,
where all directors’ and shareholders’ meetings have been held since incorporation.
D. QRS Inc. was incorporated in New York state. However, all of the directors are residents
of Ontario and all meetings of the board of directors have been held in that province since
incorporation.

(Residence - Individuals And Corporations)
For each of the following persons, indicate how they would be taxed in Canada for the current
year. Your answer should explain whether the person is a Canadian resident, what parts of their
income would be subject to Canadian taxation, and the basis for your conclusions.
A. Mr. Samuel Salazar lives in Detroit, Michigan, and is a full time employee of a business in
Windsor, Ontario. His responsibilities with the business in Windsor require him to be pres-
ent for about eight hours per day, five days per week. His annual salary in his Windsor posi-
tion is $72,000 per year.
B. Mr. John Wills is a Canadian citizen who, until September 1 of the current year, had spent
his entire life living in Regina. On September 1 of the current year, after disposing of all of
his Canadian property, Mr. Wills moved his entire family to Bismarck, North Dakota, where
he opened a mixed martial arts school.
C. Joan Brothers was born in Livonia, Michigan. She is seven years old and has never vis-
ited Canada. She has no income of her own.Her father has been consul in the Canadian

onsulate in Livonia for the past 15 years. He was a resident of Canada immediately prior to
C
his appointment as consul.
D. Brogan Inc. was incorporated in Montana in 1993, but until five years ago, all of the direc-
tors’ meetings were held in Calgary, Alberta. Five years ago, the president of the company
moved to Butte, Montana, and since that time all of the directors’ meetings have been held
in Butte.
E. Mercer Ltd. was incorporated in British Columbia in 1963 and all of its directors’ meetings
were held in Vancouver until May 1997. In June 1997, all of the directors moved to Portland,
Oregon, and all subsequent directors’ meetings were held in Portland.
F. The Booker Manufacturing Company was incorporated in 1963 in Minnesota. The direc-
tors of the company have always been residents of Winnipeg and, as a consequence, all
meetings of the board of directors have been held in Winnipeg since the company was first
incorporated.

(Residence of Individuals, Trusts, & Corporations)
In each of the following three situations determine whether, in 2020, the individual, corporation,
or trust is (1) a factual resident of Canada, (2) a deemed resident of Canada, or (3) a deemed non-
resident of Canada. Consider the Canada/US tax treaty but only to the limited extent discussed
in Chapter 1.
Case 1 – Individuals
Jim Bradley was born and raised in Canada. He married his high school sweetheart, June
Merriweather, and together they raised three children in the Greater Toronto Area. They divorced
in 2018. June has custody of the three children who are all less than ten years old. Jim moved to
the United States in late 2018 where he found a full-time job, acquired a home, and remarried.
Jim’s U.S. employer has many clients in Toronto and frequently sends him there on business,
giving him the opportunity to spend time visiting his children. Jim will spend at least 200 days
in Canada in 2020.
Case 2 – Corporations
Bart, Lisa, and Maggie are all Canadian residents living in Montreal. Together they operate a Cana-
dian digital media business but are looking to expand to the U.S. They incorporate a company in
Wyoming called Sitcom Inc. that will carry on the U.S. part of their business. The board of directors
is made up of Bart, Lisa, and Marge, who will be the CEO of the company. Marge is a U.S. citizen
and resident. Director meetings are held in Montreal with Marge teleconferencing in.
Case 3 – Trusts
Jan and Dean have lived in Moncton, New Brunswick, for 10 years where they have raised their
family. They have been very successful writing and selling folk songs, but their level of income
has put them in the highest federal tax rate of 33 percent. They recently asked their accountant if
they could do something to reduce their taxes. Their accountant suggested a complex structure
that relies upon the creation of a family trust situated in the Cayman Islands. The beneficiaries
of the trust will be Jan and Dean and their children. The trust will be created by a friend of the
accountant who will also be the sole trustee who will take directions from Jan and Dean before
any decisions are made on behalf of the trust.


(Net Income For Tax Purposes)
The following two Cases make different assumptions with respect to the amounts of income
and deductions of Mr. Morris Dorne for the current taxation year:
Case A Mr. Dorne had employment income of $50,000 and interest income of $12,000.
His unincorporated business lost $23,000 during this period. As the result of dispositions
of capital property, he had taxable capital gains of $95,000 and allowable capital losses of
$73,000. His Subdivision e deductions for the year totalled $8,000. He also experienced a
loss of $5,000 on a rental property that he has owned for several years.
Case B Mr. Dorne had employment income of $45,000, net rental income of $23,000,
and a loss from his unincorporated business of $51,000. As the result of dispositions of
capital property, he had taxable capital gains of $25,000 and allowable capital losses of
$46,000. His Subdivision e deductions for the year amounted to $10,500. Fortunately for
Mr. Dorne, he won $560,000 in a lottery on February 24.
Required: For both Cases, calculate Mr. Dorne’s Net Income For Tax Purposes (Division B
income). Indicate the amount and type of any loss carry overs that would be available at the end
of the current year, or state that no carry overs are available.

(Net Income For Tax Purposes - Four Cases)
The following four Cases make different assumptions with respect to the amounts of income
and deductions of Karl Marks for the current year:
Case A Case B Case C Case D
Employment Income $73,300 $41,400 $ 89,400 $34,300
Income (Loss) From Business ( 14,700) ( 4,700) ( 112,600) ( 47,800)
Rental Income (Loss) 8,300 5,900 5,300 ( 20,100)
Taxable Capital Gains 42,400 7,800 23,700 24,700
Allowable Capital Losses ( 18,600) ( 11,600) ( 21,200) ( 26,300)
Subdivision e Deductions ( 6,200) ( 2,800) ( 22,400) ( 6,400)
Required: For each Case, calculate Mr. Marks’ Net Income For Tax Purposes (Division B

(Net Income For Tax Purposes - Four Cases)
The following four Cases make different assumptions with respect to the amounts of income
and deductions available to Mr. Emerson Comfort for the current taxation year:
Case 1
During the year, Emerson has net employment income of $123,480, interest income of
$4,622, and taxable capital gains of $24,246. He has allowable capital losses of $4,835.
He has deductible child care costs of $9,372.

Case 2
During the year, Emerson has net business income of $72,438 and a net rental loss of
$9,846. His taxable capital gains for the year total $4,233, while his allowable capital
losses for the year are $7,489. Because of his very high Earned Income in the previous
year, he is able to make a $22,000 deductible RRSP contribution.
Case 3
During the year, Emerson has net employment income of $47,234 and a net business
loss of $68,672. Capital gains for the year total $12,472 while capital losses are realized
in the amount of $9,332. He has deductible child care costs of $3,922.
Case 4
During the year, Emerson has interest income of $6,250, net business income of
$43,962, and capital gains of $12,376. He also has a net rental loss of $72,460 and
capital losses of $23,874. As he moved to a new work location during the year, he has
deductible moving expenses of $7,387.
Required: For each Case, calculate Emerson’s Net Income For Tax Purposes (Division B

(Net Income for Tax Purposes)
Facts
During 2020 Vincent’s initial income and expenses are as follows;
• Employment income $ 82,000
Deductible Employment expenses 7,100
• Business income $105,000
Deductible Business expenses 49,000
• Rental income $ 12,000
Deductible Rental expenses 37,000
• Dividends required to be included in income $ 10,000
Interest on loan to purchase the shares 19,000
• Deductible RRSP Contributions $ 22,000
• Deductible moving expenses $ 9,200
• Taxable capital gains $ 58,000
• Allowable capital losses; includes an allowable
business investment loss (ABIL) of $37,000 $104,000
Required – Part 1: Determine Vincent’s income for the 2020 year – follow the ITA 3 format
shown in Figure 1-4 in Chapter 1. Also indicate whether or not there are any loss carryovers.
Required – Part 2: The CRA subsequently audited Vincent and determined that the amount
reported as an ABIL was a regular capital loss. What are the results?
Required – Part 3: Assume that the CRA never audited Vincent but the accountant spotted
three errors as follows:
1. The deductible business expenses should have been $149,000 not $49,000;
2. Deductible spousal support in the amount of $24,000 was missed;
3. Taxable capital gains were overstated by $17,000 because of certain reserves.

Chapter 1 Supplementary Self Study Problems Volume 1 Page 9
SSS Problem One–2
Chapter 1 Supplementary Self Study Problems

The solutions to these SSS Problems can be found at the end of this document.
SSS Problem One–1

(Qualitative Characteristics)
With the growing importance of free trade and e-commerce, Canada is contemplating increased
harmonization of the Canadian tax system with other major tax regimes in the world. Harmonization
with the United States is the first priority, with harmonization with other major economic groups being
secondary. Assume the following changes are proposed:
A. Taxing all e-commerce transactions based on where the goods and services are delivered.
B. Full deduction of mortgage interest related to principal residences, combined with taxation of
capital gains arising on dispositions of these residences. Currently in Canada, the capital gains
on the disposition of principal residences are not taxed and mortgage interest related to principal
residences is not deductible.
C. Requiring corporations that are under common control to file a single consolidated tax return
for all of the corporations in the group.
D. Conversion of the GST system into a national sales tax to be applied to the sale of goods and
services at the retail level.
Required: Indicate a significant tax advantage, other than the benefits associated with international
harmonization, that would result from introducing each of the proposed changes. In addition, analyze
each proposed change using two of the qualitative characteristics of tax systems that are listed in
your text.
For your convenience, the list of qualitative characteristics presented in the text is as follows:
• equity or fairness
• neutrality
• adequacy
• elasticity
• flexibility
• simplicity and ease of compliance
• certainty
• balance between sectors
• international competitiveness
SSS Problem One–2

(Residency of Individuals And Corporations)
For each of the following persons, indicate how they would be taxed in Canada for the year ending
December 31, 2020. Your answer should explain whether the person is a Canadian resident and the
basis for your conclusions.
A. Martin Judge was born in Kamloops, British Columbia, in 1990. In 1995, Martin’s family
moved to southern California and, until October 1, 2020, Martin did not return to Canada.
On October 1, 2020, Martin accepted a position with an accounting firm in London, Ontario.
He returned to Canada and began working at his new job on this date.

SSS Problem One–3
B. Ms. Gloria Salinas is a Canadian citizen who, on November 1, 2020, is appointed as

Canada’s new ambassador to Mexico. While Ms. Salinas was born in, and grew up in, Nova
Scotia, she has resided in Mexico for the last 15 years. She anticipates that she will continue
to live in Mexico subsequent to her appointment as the Canadian ambassador.
C. Roberto Salinas is the 12 year old son of Ms. Gloria Salinas (see Part B). Roberto has lived
with his mother in Mexico since his birth.
D. Kole Ltd. was incorporated in Alberta in 1962 and, until December 31, 2015, carried on
most of its business in that province. However, on January 1, 2015, the head office of the
corporation moved to Oregon and the company ceased doing business in Canada in all
subsequent years.
E. Forman Inc. was incorporated in Syracuse, New York, during 2018. However, the head
office of the corporation is in Smith Falls, Ontario, and all meetings of the board of directors
are held in that city.
SSS Problem One–3

(Residency/Dual Residency-Individuals)
Determine the residency status of the two individuals in the following Cases. Use the tie-breaker
rules found in the Canada/U.S. tax treaty where appropriate.
Case A Brad is a U.S. citizen who has been living in Seattle, Washington. Through an online
dating service, he meets Sarah in 2019. She is a Canadian citizen who lives and works in
Vancouver. After several face-to-face meetings they conclude that they should marry and, after
much discussion, they decide that they will live in Seattle after the marriage. Since Sarah is
committed to remaining in her position in Vancouver until September 2020, in December 2019,
Brad takes a 10 month leave of absence from his job and gives up his apartment in Seattle. On
January 1, 2020, they move in together, sharing an apartment in Vancouver that is leased on a
month-to-month basis. On September 15, 2020, they get married, terminate the Vancouver
lease, and move to a newly purchased house in Seattle.
Case B Helen is a single individual who makes her living painting portraits of wealthy
individuals. She is a U.S. citizen and has, in recent years, worked in Burlington, Vermont. Of late,
business has dropped off and, as a consequence, she decided to try working in Montreal.
Because of the uncertainty involved in her line of work, she does not sell her Burlington
residence, asking a friend to watch it while she is absent. On April 15, 2020, she moves to
Montreal. She lives in various Montreal hotels until January 15, 2021. At this time she concludes
that the work situation is no better in Montreal than it was in Burlington. Given this, she returns
to Burlington.

SSS Problem One–5
SSS Problem One–4

(Net Income For Tax Purposes-Two Cases)
The following two Cases make different assumptions with respect to the amounts of income and
deductions for the current year for Christophe Szabo, a Canadian resident.
Case A Christophe has employment income of $46,700, interest income of $3,500, a net
rental loss of $22,250, and a net business loss of $37,260. Dispositions of capital property
during the current year had the following results:
Taxable Capital Gains $13,470
Allowable Capital Losses 10,540
Christophe paid deductible spousal support of $500 per month. His cash position was
significantly improved when he won a provincial lottery prize of $450,000 during the year.
Case B Christophe had employment income of $75,400, interest income of $4,560, and a
net rental loss of $12,200.
Dispositions of capital property during the current year had the following results:
Allowable Capital Losses 9,460
Subdivision e deductions for the current year were child care costs of $4,520, RRSP contributions
of $6,570, and spousal support payments of $3,600.
Required: For both Cases, calculate Christophe’s Net Income For Tax Purposes (Division B
income). Indicate the amount and type of any loss carry overs that would be available at the end of
the current year.
SSS Problem One–5

(Net Income For Tax Purposes-Four Cases)
The following four Cases make different assumptions with respect to the amounts of income and
deductions of Jonathan Oakley for the current year:
Case A Case B Case C Case D
Employment Income $83,000 $92,000 $46,000 $57,000
Income (Loss) From Business ( 22,000) ( 22,000) 21,000 16,000
Rental Income (Loss) 12,000 16,000 ( 42,000) ( 92,000)
Taxable Capital Gains 81,000 18,000 22,000 31,000
Allowable Capital Losses ( 35,000) ( 32,000) ( 53,000) ( 35,000)
Subdivision e Deductions ( 15,000) ( 12,000) ( 16,000) ( 17,000)
Required: For each Case, calculate Mr. Oakley’s Net Income For Tax Purposes (Division B income).
Indicate the amount and type of any loss carry overs that would be available at the end of the current
year, or state that no carry overs are available.

Chapter 1 Supplementary Self Study (SSS) Solutions Volume 1 Page 12
Solution to SSS Problem One–2
Chapter 1 Solutions to Supplementary Self Study Problems

Given the subject matter of this question, there are many answers that would satisfy the requirements
of the problem. Those listed below should only be considered as examples of possible solutions.
A. A big advantage here would be the likelihood that Canadian tax revenues would increase. In
terms of qualitative characteristics, two possibilities would be:
• More neutrality, as businesses would no longer make location decisions based on the
tax status of the shipping point.
• Complexity would be added in terms of finding a mechanism to enforce collections.
B. A possible advantage would be economic development in that the deductibility of interest could
encourage real estate purchases. In terms of qualitative characteristics, two possibilities would
be:
• Vertical equity in the sense that high income taxpayers benefit most from the non-
taxation of capital gains on the disposition of a principal residence.
• Balance between sectors would be improved as the tax relief on interest payments would
reduce taxes on individuals.
C. A major advantage would likely be increased revenues as the ability to use multiple corporate
structures for tax planning purposes would be reduced. In terms of qualitative characteristics, two
possibilities would be:
• More neutrality, as it would remove the incentive to make investment decisions on the
basis of multiple corporate structures.
• There would be greater ease of compliance as only one tax return would be required.
D. The major advantage here would likely be greater ease of compliance for business. In terms of
qualitative characteristics, two possibilities would be:
• Simplicity and ease of compliance would be improved.
• Certainty would be improved, in that taxpayers would be more aware of the amounts to
be paid, without having to do the additional calculations required for input tax credits.

Case A
Martin Judge would be considered resident in Canada for the part year beginning October
1, 2020, and would be taxed on his worldwide income for this period. This conclusion is based on the
assumption that he did not become a resident of Canada until he returned to Canada and began
working at his new position.
Case B
Ms. Gloria Salinas would not be considered a Canadian resident. As a result, none of her income
would be subject to Canadian taxes. ITA 250(1)(c)(i) indicates that an ambassador of Canada will be
deemed to be a Canadian resident only if she was resident in Canada immediately prior to her
appointment to the position

Case C
Roberto Salinas would not be considered a Canadian resident. As a result, none of his income (if
any) would be subject to Canadian taxes. While ITA 250(1)(f) indicates that a child of an ambassador
who is a deemed resident under ITA 250(1)(c)(i) is also a deemed resident, Roberto’s mother is not
such a deemed resident. Therefore, Roberto would not be considered a Canadian resident.
Case D
Kole Ltd. would be considered resident in Canada based on ITA 250(4)(c), which indicates that a
corporation is resident in Canada if it was incorporated in Canada prior to April 27, 1965, and carried
on business, or was resident in Canada in any year ending after April 26, 1965. Based on the location
of its mind and management, it would also be considered a resident of the U.S. Given this dual
residency, the tie-breaker rule in the Canada/U.S. tax treaty would resolve the situation by making
the company a resident of its country of incorporation. This would result in Kole Ltd. being considered
a resident of Canada, the country of incorporation.
Case E
Forman Inc. would be considered resident in Canada because of the location of its mind and
management. However, as Forman was incorporated in the U.S., it would also be considered a
resident of that country. Given this dual residency, the tie-breaker rule in the Canada/U.S. tax treaty
would resolve the situation by making the company a resident of its country of incorporation. This
would result in Forman being considered a resident of the U.S., and a non-resident of Canada.

Case A
As Brad was in Canada for more than 183 days in 2020, he is a deemed resident through the
application of the sojourner rule, and therefore a dual resident. In applying the tie-breaker rules, the
first factor that is considered is in which country the individual has a permanent home.
With respect to this criterion, Brad would not be considered to have a permanent home in either
country. He gave up his lease on the Seattle property and, given that he only planned to stay for a
short period of time, the Vancouver apartment would not be considered a permanent home. In the
absence of a permanent home in either country, the next factor to consider would be the location of
Brad’s “centre of vital interests”. This would appear to be the U.S. and, given this, the tie-breaker
rules would make Brad a resident of the U.S. and a non-resident of Canada.
Sarah is a resident of Canada until September 15, 2020. Assuming she severs all residential ties
with Canada on her departure, she would become a non-resident of Canada on that date.
Case B
Because Helen is temporarily in Canada for more than 183 days in 2020, she would be considered
a deemed resident of Canada under the sojourner rules. As this makes her a dual resident of the
U.S. and Canada, the tie-breaker rules would come into play.
Since it appears that Helen has a permanent home in Burlington, the tie-breaker rules would indicate
that she is a resident of the United States. The hotels would not be considered to be a permanent
home given that Helen never intended to stay for a long period of time.


Case A
The Case A solution would be calculated as follows:
Income Under ITA 3(a):
Employment Income $46,700
Interest Income 3,500 $50,200
Income Under ITA 3(b):
Allowable Capital Losses ( 10,540) 2,930
Balance From ITA 3(a) And (b) $53,130
Spousal Support Payments [(12)($500)] (6,000)
Balance From ITA 3(c) $47,130
Deductions Under ITA 3(d):
Net Rental Loss ( 22,250)
Business Loss ( 37,260)
Net Income For Tax Purposes (Division B Income) Nil
In this Case, Christophe has rental and business loss carry overs of $12,380 ($47,130 −
$22,250 − $37,260). The provincial lottery winnings would not be included in Christophe’s Net
Income For Tax Purposes as they are not subject to tax.
Case B
The Case B solution would be calculated as follows:

Interest Income 4,560 $79,960
Allowable Capital Losses ( 9,460) Nil
Child Care Costs ( 4,520)
RRSP Contributions ( 6,570)
Spousal Support Payments ( 3,600)
Deduction Under ITA 3(d):
Net Income For Tax Purposes (Division B Income) $53,070
In this Case, Christophe has an allowable capital loss carry over of $735 ($8,725 − $9,460).


Case A
The Case A solution would be calculated as follows:
Rental Income 12,000 $95,000
Allowable Capital Losses ( 35,000) 46,000
Subdivision e Deductions ( 15,000)
Net Income For Tax Purposes (Division B Income) $104,000
In this Case, Mr. Oakley has no loss carry overs at the end of the year.
Case B
The Case B solution would be calculated as follows:
Rental Income 16,000 $108,000
Balance From ITA 3(c) $ 96,000
Net Income For Tax Purposes (Division B Income) $ 74,000
In this Case, Mr. Oakley has a carry over of $14,000 ($32,000 − $18,000) in unused
allowable capital losses.
Case C
The Case C solution would be calculated as follows:
Business Income 21,000 $67,000
Balance From ITA 3(a) and (b) $67,000
Rental Loss ( 42,000)
Net Income For Tax Purposes (Division B Income) $ 9,000

In this Case, Mr. Oakley would have an allowable capital loss carry over in the amount of
$31,000 ($53,000 − $22,000).
Case D
The Case D solution would be calculated as follows:
Business Income 16,000 $73,000
Income Under ITA 3(b): Taxable
Capital Gains $31,000
Net Income For Tax Purposes (Division B Income) Nil
Mr. Oakley would have a carry over of unused business losses in the amount of $36,000
($92,000 − $56,000) and of unused allowable capital losses in the amount of $4,000
($35,000 − $31,000).

Self Study Problem Two - 2

(Individual Tax Instalments)
For the three years 2018, 2019, and 2020, Mr. George Grafton provides the following infor-
mation on his combined federal and provincial taxes payable, along with information on
withholdings by his employer:
Year Taxes Payable Taxes Withheld

2018 $31,500 $29,800
2019 14,600 6,200
2020 (Estimated) 27,400 24,300
In January 2020, you are asked to provide tax advice to Mr. Grafton. He has asked you
whether it will be necessary for him to pay instalments in 2020 and, if so, what the minimum
amounts that should be paid are, along with the dates on which these amounts are due.
Required: Provide the information requested by Mr. Grafton. Be sure to show all required
calculations.

(Corporate Tax Instalments)
For the three taxation years ending December 31, 2020, a corporation’s combined federal
and provincial tax payable are as follows:
Year Ending December 31 Taxes Payable

2018 $101,220
2019 125,160
2020 (Estimated) 109,620
Case One The taxpayer is a small CCPC.

Case Two The taxpayer is a small CCPC. Assume that its combined federal and provincial
taxes payable for the year ending December 31, 2019, were $104,300 instead of
the $125,160 given in the problem.
Case Three The taxpayer is a publicly traded corporation.
Case Four The taxpayer is a publicly traded corporation. Assume that its combined federal and
provincial taxes payable for the year ending December 31, 2019, were $104,300
instead of the $125,160 given in the problem.

Required: For each of the preceding independent Cases, provide the following information:
1. Indicate whether instalments are required during 2020. Provide a brief explanation of your
conclusion.
2. Calculate the amount of instalments that would be required under each of the acceptable
methods available.
3. Indicate which of the available methods would best serve to minimize instalment payments
during 2020. If instalments must be paid, indicate the date on which they are due.

(Individual And Corporate Tax Instalments)
For the three years ending December 31, 2020, the taxpayer’s combined federal and provincial
tax payable was as follows:
Year Ending December 31 Taxes Payable

2018 $72,300
2019 89,400
2020 (Estimated) 78,300
Case One The taxpayer is an individual whose employer withholds combined federal and
provincial taxes of $73,700 in 2018, $83,200 in 2019, and $75,000 in 2020.
Case Two The taxpayer is an individual whose employer withholds combined federal and
Case Three The taxpayer is a small CCPC with a taxation year that ends on December 31.
Case Four The taxpayer is a publicly traded corporation with a taxation year that ends on
December 31. Assume that its combined federal and provincial taxes payable for
the year ending December 31, 2019, were $74,500, instead of the $89,400 given
in the problem.
1. Indicate whether instalments are required during 2020. Provide a brief explanation of your
conclusion. This explanation should be provided even if the amount of the required instal-
ments is nil.
2. If instalments are required, calculate the amount of instalments that would be required
under each of the acceptable methods available.
3. If instalments are required, indicate which of the available methods would best serve to
minimize instalment payments during 2020. If instalments must be paid, indicate the date
on which they are due.


For each of the following independent Cases, the taxpayer’s combined federal and provincial taxes
payable amounted to $18,000 for the year ending December 31, 2018, while for the year ending
December 31, 2019, the amount payable was $14,400. At the beginning of 2020, it is estimated
that federal and provincial taxes payable for the year ending December 31, 2020, will be $13,500.
The actual federal and provincial taxes payable for 2020, calculated in March 2021, is $16,000.
A. The taxpayer is an individual whose only income is rental income.
B. The taxpayer is an individual whose employer withholds combined federal and provin-
cial taxes of $7,000 in 2018, $15,000 in 2019, and $9,000 in 2020.
C. The taxpayer is a small CCPC with a December 31 year end.
D. The taxpayer is a publicly traded corporation with a December 31 year end. Assume
that its combined federal and provincial taxes payable for the year ending December 31,
2020, are estimated to be $16,000, instead of the $13,500 given in the problem.
Required: For each of the Cases, state whether instalments are required for the 2020 taxation
year, even if one of the methods results in required instalments of nil. Explain your conclusion.
If instalments are required, indicate:
• the best alternative for calculating the instalments;
• the amount of the instalments under that alternative showing all calculations, even if the
optimum solution is obvious;
• the dates on which the payments will be due; and
• any consequences of the 2020 estimated taxes being lower than the actual taxes payable.

(Canadian Taxable Entities)
List the three types of entities that are subject to federal income taxation in Canada and, for
each, state:
• how their taxation year is established;
• the filing deadlines for their respective income tax returns;
• how frequently income tax instalments must be made; and
• the dates on which the instalment payments must be made.

(Assessment Disputes)
Mr. Norman Coffee has been one of your major clients for years. He is extremely wealthy and
has paid his very sizable tax payable (and your fees) for decades without complaint.
On August 15th of the current year, Mr. Coffee receives a Notice of Reassessment indicating
that he owes $5,000 of additional taxes, plus interest, for the preceding taxation year. Since you
filed the tax return in dispute, Mr. Coffee expects you to deal with the matter quickly.
Required: Indicate the procedures that may be used in dealing with this dispute between the
CRA and Mr. Coffee.


(Third-Party Civil Penalties)
For each of the following independent cases, indicate whether you believe any penalty would be
assessed under ITA 163.2 on any of the parties involved. Explain your conclusion.
Case A
A newly acquired client, who is self-employed, brings to his accountant a listing of his busi-
ness expenses. The client also provides the accountant with a figure for his total revenue. He
instructs his accountant to prepare an income statement and his tax return based on this infor-
mation. The accountant has a quick look at the expenses. The expenses seem to be related to
the type of business of the client and nothing stands out as obviously unreasonable. After the
client’s income statement is prepared, it reflects $80,000 of revenue and $55,000 of expenses
and the income tax return is filed on that basis.
Upon audit, the CRA finds a large proportion of the expenses claimed cannot be substantiated
by adequate documentation and may not have been incurred. Furthermore, the reported rev-
enue is only half of actual revenue.
Case B
A company is selling units in a limited partnership tax shelter. The company had acquired soft-
ware for $50,000 on the open market and transferred it to the limited partnership on the same
day for $10,000,000. The prospectus prepared by the company states that the fair market value
of the software is $10,000,000 and is supported by an appraisal. The tax shelter is registered
with the CRA and is available as an investment opportunity in the current year. The company’s
gross entitlements are $2,000,000.
The CRA reviews the tax shelter and determines that the fair market value of the software on the
day of transfer into the limited partnership is $50,000. The appraisal supporting the $10,000,000
value was prepared by an independent appraiser. However, it was not prepared using normal
valuation principles. The appraiser informed the CRA that all his calculations were based on the
assumptions and other relevant facts provided to him by the company. The appraiser was paid
$75,000 for the appraisal.
Case C
An accountant relies on the financial statements prepared by another professional accountant
to report her client’s self-employment income on the client’s tax return. The statements did not
look obviously unreasonable. The CRA conducts an audit and discovers that the income state-
ment contained material misrepresentations.
Case D
An accountant has prepared a tax return for a new client. While the accountant has known the
individual for some time, this is the first time that he has done any work for him.
In preparing the new client’s tax return he is given a T4 slip that reports $40,000 in income. The
client indicates that this is his only source of income.
You are surprised by this as you know that the client lives in a home that is worth at least
$2 million, has an expensive cottage in Huntsville, and drives a $275,000 Bentley. When the
accountant asks the client about this, he indicates that, several years ago, he received a large
inheritance from his parents.
The accountant does not ask any further questions and prepares and files the return. When the
taxpayer is audited it is discovered that he has over $400,000 in unreported income.
Case E
A taxpayer approaches a tax return preparer to prepare and file her tax return. Prior to this, the
tax return preparer and his firm did not provide any services to the taxpayer and they did not
know each other.

The taxpayer provides the tax return preparer with a T4 slip indicating that the taxpayer has
$32,000 of employment income, which represents her sole source of income.
The taxpayer tells the tax return preparer that she made a charitable donation of $20,000 but
forgot the receipt at home. The taxpayer asks that the tax return preparer prepare and efile the
tax return without obtaining the receipt as it is April 29. The tax return preparer does so in order
to avoid late filing the return.
Case F (Requires Basic GST Knowledge)

An annual GST return filer informs her accountant that she has not kept records of the GST paid
or payable on her business purchases for the year. The accountant informs her that he will make
an input tax credit claim for GST paid based on the financial statements of her business. The
amounts on the financial statements are reasonable and have been incurred.
The income statement includes a large amount for wages and interest expense on which GST is
not paid. The cost of sales includes a large proportion of purchases that are zero-rated on which
GST is not paid. The accountant applies a factor of 5/105 to all expenses shown in the income
statement. This results in an overstatement of input tax credits reported on the GST return.

SSS Problem Two–2

SSS Problem Two–1

In January 2020, you are asked to provide tax advice to Ms. Leslie Garond. She has provided you
with the following information about her combined federal and provincial taxes payable and the
income taxes withheld by her employer for the 2018 and 2019 taxation years:

2018 $22,000 $9,500
2019 18,000 9,700
For 2020, she estimates that her combined federal and provincial taxes payable will be
$14,000 and that her employer will withhold a total of $9,850 in income taxes.
She has asked you whether it will be necessary for her to pay instalments in 2020 and, if so, what
the minimum amounts that should be paid are and when they are due.
Required: Advise Ms. Garond as to whether or not she is required to make instalment payments
for 2020. If instalments are required, calculate the alternative amounts that could be paid. Indicate
which alternative would be best and the dates on which the payments should be made.
SSS Problem Two–2

In January 2020, you are asked to provide tax advice to Mr. Lester Gore. For the three years
2018, 2019, and 2020, he provides the following information on his combined federal and
provincial taxes payable, along with information on withholdings by his employer:

2018 $15,000 $11,500
2019 10,800 11,750
2020 (Estimated) 17,000 13,000
He has asked you whether it will be necessary for him to pay instalments in 2020 and, if so,
what is the minimum he has to pay and when.
Required: Provide the information requested by Mr. Gore. Your answer should include a
conclusion on whether or not instalments are required. If instalments are required, indicate the
alternative amounts that could be remitted, the best alternative to use, and the dates on which
the instalments should be paid.

SSS Problem Two–4
SSS Problem Two–3

For the year ending December 31, 2018, the taxpayer’s combined federal and provincial taxes
payable amounted to $93,000, while for the year ending December 31, 2019, the amount payable
was $108,000. It is estimated that federal and provincial taxes payable for the year ending
December 31, 2020, will be $82,500.
Case A The taxpayer is an individual whose employer withholds combined federal and
Case B The taxpayer is an individual whose employer withholds combined federal and provin-
cial taxes of $91,500 in 2018, $98,700 in 2019, and $78,300 in 2020.
Case C The taxpayer is a small CCPC with a December 31 year end.
Case D The taxpayer is a publicly traded corporation with a December 31 year end. Assume
that its combined federal and provincial taxes payable for the year ending December 31, 2018,
were $78,100, instead of the $93,000 given in the problem.
1. Indicate whether instalments are required during the year ending December 31, 2020, including
a brief explanation of your conclusion. This explanation should be provided even if the amount
of the required instalments is nil.
2. Calculate the amount of instalments that would be required under each of the acceptable
methods available.
3. Indicate which of the acceptable methods would best serve to minimize instalment payments
during 2020. If instalments must be paid, indicate the date on which they are due.
SSS Problem Two–4

(Instalments, Interest, And Penalties For Corporations)
The fiscal year of the Sloan Company, a public company, ends on October 31. During the year
ending October 31, 2018, its federal taxes payable amounted to $168,000, while for the year
ending October 31, 2019, the federal taxes payable were $153,000. It is estimated that federal
taxes payable for the year ending October 31, 2020, will be $144,000.
Required:
A. Calculate the instalment payments that are required for the year ending October 31, 2020,
under each of the alternative methods available. Indicate which of the alternatives would be
preferable.
B. If the company did not make any instalment payments toward its 2020 taxes payable and did
not file its corporate tax return or pay its taxes payable on time, indicate how the interest and
penalty amounts assessed against it would be determined (a detailed calculation is not
required).

SSS Problem Two–5
SSS Problem Two–5

(Tax Preparer’s Penalty)
For each of the following independent Cases, indicate whether you believe a penalty would be
assessed against the tax return preparer under ITA 163.2. Explain your conclusion.
A. Accountant X is asked by Client A to prepare a tax return including a business financial
statement to be used in the return. In response to a request by Accountant X for business
related documents, Client A supplies information to Accountant X, which includes a travel
expense receipt. Accountant X relies on this information provided by Client A and prepares the
business statement that is filed with the return. The CRA conducts a compliance audit and
determines that Client A’s travel expense was a non-deductible personal expense.
B. Accountant X has several clients that have been reassessed in respect of a tax shelter.
Accountant X knows that the CRA is challenging the tax effects claimed in respect of the tax
shelter on the basis that the shelter is not a business, is based on a significant overvaluation of
the related property, and is technically deficient in its structure. The Tax Court of Canada, in a
test case (general procedures), denies deductions claimed in respect of the tax shelter in a
previous year by Client B (a client of Accountant X). Client B’s appeal is dismissed. The case is
not appealed, and Accountant X is aware of the court’s decision. Accountant X prepares and
files a tax return on behalf of Client C that includes a claim in respect of the same tax shelter
that the Tax Court denied deductions for.
C. Taxpayer Z approaches Tax-preparer X to prepare and EFILE Z’s tax return. Taxpayer Z
provides X with a T4 slip indicating that Z has $32,000 of employment income. Taxpayer Z
advises X that he made a charitable donation of $24,000 but forgot the receipt at home. Z asks
that X prepare and EFILE the tax return. In fact, Z never donated anything to a charity. X
prepares Z’s tax return without obtaining the receipt.

Solution to SSS Problem Two–2

Need For Instalments
Instalments are required when an individual’s “net tax owing” exceeds $3,000 in the current year
and in either of the two preceding years. In somewhat simplified terms, “net tax owing” is defined as
the combined federal and provincial taxes payable, less amounts withheld under ITA 153.
Ms. Garond’s net tax owing figures are as follows:
2018 = $12,500 ($22,000 − $9,500)
2019 = $ 8,300 ($18,000 − $9,700)
2020 = $ 4,150 ($14,000 − $9,850) Estimate
As Ms. Garond’s net tax owing in all three of the years exceeds $3,000, she is required to make
instalment payments.
Alternative Amounts
There are three possible alternatives for remitting instalments. These are as follows:
• Quarterly instalments of $1,037.50 ($4,150 ÷ 4) based on the current year estimate.
• Quarterly instalments of $2,075.00 ($8,300 ÷ 4) based on the first preceding year.
• Two quarterly instalments of $3,125.00 ($12,500 ÷ 4) based on the second preceding
year, followed by two instalments of $1,025.00 {[$8,300 − (2)($3,125)] ÷ 2}.
Best Alternative
The best alternative would be four instalments of $1,037.50.
Payment Dates
The quarterly payments would be due on March 15, June 15, September 15, and December 15.

Need For Instalments
Instalments are required when an individual’s “net tax owing” exceeds $3,000 in the current year
and in either of the two preceding years. In somewhat simplified terms, “net tax owing” is defined as
the combined federal and provincial taxes payable, less amounts withheld. Mr. Gore’s estimated
net tax owing for the three years under consideration is as follows:
2018 = $3,500 ($15,000 − $11,500)
2019 = Nil ($10,800 − $11,750)
2020 = $4,000 ($17,000 − $13,000) Estimate
As Mr. Gore’s net tax owing in 2020 (the current year) and his net tax owing in 2018 (one of the two
preceding years) is greater than $3,000, he is required to make instalment payments.
Alternative Amounts
There are three possible alternatives for remitting instalments. These are as follows:
• Quarterly instalments of $1,000 ($4,000 ÷ 4) based on the current year estimate.
• Quarterly instalments of nil based on the first preceding year.
• Two quarterly instalments of $875 ($3,500 ÷ 4) based on the second preceding year. No further
instalments will be required.

Best Alternative
The best alternative would be four instalments of nil, i.e., no instalments being paid.
Payment Dates
If payments were required, they would be due on March 15, June 15, September 15, and
December 15. However, since the prior year’s net tax owing was nil, no instalments are required.
Case A
1. The individual’s net tax owing for the relevant three years is as follows:
2018 $6,300 ($93,000 − $86,700)
2019 Nil (Withholdings Exceed Tax Payable)
2020 $3,300 ($82,500 − $79,200)
As the net tax owing exceeds $3,000 in the current year and one of the two preceding years,
instalments are required.
2. The three alternatives would be:
• Quarterly instalments of $825 ($3,300 ÷ 4) based on the current year estimate.
• Quarterly instalments of nil based on the first preceding year.
• Two quarterly instalments of $1,575 ($6,300 ÷ 4) based on the second preceding year.
No further instalments will be required.
3. The best alternative would be quarterly instalments of nil, based on the first preceding year.
There was no net tax owing for that year.
Case B
1. The individual’s net tax owing for the relevant three years is as follows:
2018 $1,500 ($93,000 − $91,500)
2019 $9,300 ($108,000 − $98,700)
2020 $4,200 ($82,500 − $78,300)
As the net tax owing exceeds $3,000 in the current year and one of the two preceding years,
instalments are required.
2. The three alternatives would be:
• Quarterly instalments of $2,325 ($9,300 ÷ 4) based on the first preceding year.
• Two quarterly instalments of $375 ($1,500 ÷ 4) based on the second preceding year,
followed by two instalments of $4,275 {[$9,300 − (2)($375)] ÷ 2}.
3. The best alternative would be quarterly instalments of $1,050, for a total of $4,200. This is much
lower than the total of $9,300 required under the other two alternatives.
The instalments are due on March 15, June, 15, September 15, and December 15.
Case C
1. As the corporation’s tax payable for both the current and the preceding year exceeds
$3,000, instalments are required. As the corporation is a small CCPC, quarterly instalments
can be used.
2. The three acceptable alternatives would be as follows:

• Quarterly instalments of $27,000 ($108,000 ÷ 4) based on the first preceding year.

• One quarterly instalment of $23,250 ($93,000 ÷ 4) based on the second preceding year,
followed by three instalments of $28,250 [($108,000 − $23,250) ÷ 3], a total of $108,000.
3. The best alternative would be quarterly instalments of $20,625 based on the current year Tax
Payable estimate. The total would be $82,500, significantly less than the $108,000 total
under the other two methods.
The instalments are due on March 31, June 30, September 30, and December 31.
Case D
1. As the corporation’s tax payable for both the current and the preceding year exceeds $3,000,
instalments are required. As the corporation is not a small CCPC, monthly instalments are
required.
2. The three acceptable alternatives would be as follows:
• Monthly instalments of $6,875 ($82,500 ÷ 12) based on the current year estimate.
• Monthly instalments of $9,000 ($108,000 ÷ 12) based on the first preceding year.
• Two monthly instalments of $6,508.33 ($78,100 ÷ 12) based on the second preceding
year, followed by 10 monthly instalments of $9,498.33 {[$108,000 − (2)($6,508.33) ÷ 10]},
a total of $108,000.
3. The best alternative would be monthly instalments of $6,875, based on the current year Tax
Payable estimate. The total would be $82,500, significantly less than the $108,000 total under
the other two methods.
The instalments would be due on the last day of each month, beginning in January.
Part A
Under ITA 157(1), the Sloan Company would have three alternatives with respect to the calcu-
lation of its instalment payments. The alternatives and the relevant calculations are as follows:
Current Year Base The instalment payments could be 1/12th of the estimated taxes
payable for the current year. In this case the resulting instalments would be $12,000 per
month ($144,000 ÷ 12).
Preceding Year Base The instalment payments could be 1/12th of the taxes payable in
the immediately preceding taxation year. The resulting instalments would be
$12,750 ($153,000 ÷ 12).
Preceding And Second Preceding Years The third alternative would be to base the first
two instalments on 1/12th of the taxes payable in the second preceding year and the
remaining 10 instalments on 1/10th of the taxes payable in the preceding year less the total
amount paid in the first two instalments.
In this case, the first two instalments would be $14,000 ($168,000 ÷ 12) and the remaining
10 instalments would be $12,500 [($153,000 − $28,000) ÷ 10]. The total instalments under
this approach would be $153,000.
As the company has been experiencing a decline in its taxes payable over this three year period,
the payments based on the current year’s estimated taxes payable would be the most favourable in
terms of minimizing cash outflows.

Part B
If the company failed to make instalment payments toward the 2020 taxes payable, it would be
liable for interest from the date each instalment should have been paid to the balance due date,
December 31, 2020.
Assuming the actual 2020 taxes payable are $144,000, it would be the least of the amounts
described in ITA 157(1), and interest would be calculated based on this instalment alternative. The
rate charged would be the one prescribed in ITR 4301 for amounts owed to the Minister, the regular
rate plus 4 percentage points.
There is a penalty on large amounts of late or deficient instalments. This penalty is specified in ITA
163.1 and is equal to 50 percent of the amount by which the interest owing on the late or deficient
instalments exceeds the greater of $1,000 and 25 percent of the interest that would be owing if no
instalments were made. While detailed calculations are not required, we would note that this
penalty would be applicable in this case.
Interest on the entire balance of $144,000 of taxes payable would be charged beginning on the
balance due date, December 31, 2020. The rate charged would be the one prescribed in ITR 4301
for amounts owed to the Minister, the regular rate plus 4 percentage points.
There is also a penalty for late filing. If no return is filed by the filing date, the penalty amounts to
5 percent of the tax that was unpaid at the filing date, plus 1 percent per complete month of the
unpaid tax for a maximum period of 12 months. This penalty is in addition to any interest charged
due to late payment of instalments or balance due. In addition, interest would also be charged on
any penalties until such time as the return is filed or the instalments (balance due) paid.
The late file penalty could be doubled to 10 percent, plus 2 percent per month for a maximum of
20 months for a second offence within a three year period.
Part A
Accountant X is not liable for participating in an understatement of Client A’s taxes payable
because Accountant X did not know the expense receipt was personal in nature, and would not be
reasonably expected to know, but for circumstances amounting to culpable conduct, that this was
the case. This is because X relied in good faith on the information provided by A.
Part B
Based on these facts, Accountant X would be liable for a third party penalty. However, if
Accountant X had determined that there was a reasonable basis upon which the Tax Court decision
could be overturned by a higher court, the penalty would not apply.
Part C
Based on these facts, if X were to prepare and EFILE Z’s return without obtaining the charitable
donation receipt, X would be liable for a third party penalty. Given that the size of the donation is so
disproportionate to Z’s apparent income as to defy credibility, to EFILE the return without verifying
the amount of the receipt would show an indifference as to whether the Act is complied with or
would show a wilful, reckless, or wanton disregard of the law.

Self Study Problem Three - 3

(Bonus Arrangements)
Empire Inc. has an October 31 year end. On October 31, 2020, the company accrues a bonus of
$250,000, payable to Joan Betz, the president of the company.
Required: For each of the following cases, indicate the taxation year in which the company
could deduct the bonus, as well as the taxation year in which Ms. Betz would have to include it
in her taxable income.
Case A The bonus is paid on November 1, 2020.
Case B The bonus is paid on January 1, 2021.
Case C The bonus is paid on June 30, 2021.
Case D The bonus is paid on January 1, 2024.

(Employee Vs. Self-Employed)
Farnham Ltd. is interested in acquiring the services of a highly qualified engineering profes-
sional. This individual has agreed to become an employee at a salary of $250,000 per year. For
employees, the cost of providing benefits (pension plan and extended health care) is about
8 percent of gross wages. In addition to CPP and EI, the province levies a 2 percent payroll tax
to provide for health care. The tax applies to all wages and salaries with no upper limit.
This individual’s work is such that a contract could be arranged that would make him an inde-
pendent contractor. However, because he likes the security and benefits associated with being
an employee, the contract would have to provide income of $280,000 in order for him to find it
acceptable.
Required: Advise the company as to the preferable alternative.

(Taxable Automobile Benefits)
It is the policy of Dorsey Ltd. to provide automobiles to four of their senior executives. The cars
may be used for both employment related activities as well as personal travel. When it is not being
used by the employee, the company requires the cars to be returned to the company’s garage.
For 2020, the details regarding the use of these cars is as follows:
Ms. Marianne Dorsey Marianne is the president of the company. She is provided with
a Bentley Flying Spur Sedan. The company paid $185,000 for this car two years ago.
During the current year, the car was driven 53,000 kilometres, of which 18,000 could
be considered to be employment related travel. Operating costs, all of which were paid
by the company, totaled $27,500 for the year. The car was available to Marianne for 11
months of the year.
Mr. John Dorsey John is the vice president in charge of finance. His car is a BMW 528
purchased by the company for $71,500. During the 10 months that the car was available to
John during the current year, he drove a total of 93,000 kilometres, of which 22,000 involved
personal travel. Operating costs, all of which were paid by the company, totaled $18,600.

Ms. Misty Dorsey Misty is the vice president in charge of design. She is provided with
an Infiniti Q60 IPL, which the company leases for $620 per month. This amount includes
a $100 per month payment for insurance. The car is available to Misty throughout the
current year, during which she drives a total of 51,000 kilometres. Of this total, only
14,000 kilometres involve employment travel. Operating costs, all of which were paid
by the company, totaled $11,300. Because of her extensive personal use of the vehicle,
Misty pays the company $200 per month.
Mr. Saul Dorsey Saul is the vice president in charge of marketing for the company.
He is provided with a Tesla Model S, which the company leases for $1,200 per month.
No insurance is provided through this payment. During the current year, Saul drives the
car a total of 31,200 kilometres, of which 29,500 are employment related. The operating
costs average $0.28 per kilometre and are paid for by the company. The car is available
to Saul for eight months during the current year.
Required: Calculate the minimum taxable benefit that will accrue to each of these executives
as the result of having the cars supplied by the company. Ignore all GST/PST/HST implications.

The Carstair Manufacturing Company’s taxation year ends on December 31. During the 2020
taxation year, the company provides automobiles for four of its senior executives, with the
value of the cars being in proportion to the salaries they receive. While each of the individuals
uses their car for employment related travel, they also use them for personal matters. The por-
tion of personal use varies considerably among the four individuals. When the car is not being
used by the employee, the company requires that it be returned to the corporate premises.
The details related to each of these cars, including the amount of personal and employment
related travel recorded by the executives, are as follows:
Mr. Sam Stern Mr. Stern is the president of the company and is provided with a
Mercedes, which has been purchased by the company at a cost of $78,000. The car
was new last year and, during the current year, it was driven a total of 38,000 kilometres.
Of this total, only 6,000 kilometres were for employment related purposes, while the
remaining 32,000 were for personal travel. Operating costs totaled $.50 per kilometre
and, because Mr. Stern made an extended trip outside of North America, the car was
used by Mr. Stern for eight months during the current year. During the period when he
was outside North America, the company required Mr. Stern to return the car to the
company garage.
Ms. Sarah Blue Ms. Blue is the vice president in charge of marketing and has been
provided with a Corvette. The company leases this vehicle at a cost of $900 per month.
During the current year, the car was driven a total of 60,000 kilometres, with 55,000 of
these kilometres being for employment related purposes. The car was used by Ms. Blue
throughout the current year, and total annual operating costs amounted to $18,000.
Mr. John Stack Mr. Stack is the vice president in charge of finance and he has been
provided with an Acura that was purchased by the company in the preceding year at
a cost of $48,000. During the current year, Mr. Stack drove the car 42,000 kilometres
for employment related purposes and 10,000 kilometres for personal travel. Operating
costs for the year were $20,800, and the car was used by Mr. Stack throughout the
current year. In order to reduce his taxable benefit, Mr. Stack made a payment of $7,000
to the company for the use of this car.

Mr. Alex Decker Mr. Decker, the vice president in charge of industrial relations, chose
to drive a Lexus. This car was leased by the company at a cost of $500 per month.
The lease payment was significantly reduced by the fact that the company made a
refundable deposit of $10,000 to the leasing company at the inception of the lease.
During the current year, Mr. Decker drove the car 90,000 kilometres for employment
related purposes and 8,500 kilometres for personal use. The operating costs were $0.35
per kilometre and, because of an extended illness, he was only able to use the car for
the first 10 months of the year. During the period when he was ill, the company required
Mr. Decker to return the car to the company garage.
Required: Calculate the minimum amount of the taxable benefit for the current year that will
accrue to each of these executives as the result of having the cars supplied by the company. In
making these calculations, ignore GST/HST/PST considerations. From the point of view of tax
planning for management compensation, provide any suggestions for the Carstair Manufacturing
Company with respect to these cars.

(Employer Provided Vs. Employee Owned Car)
John Rush is a key employee of Megan Ltd. (ML), a Canadian public company. He is not required
to use an automobile in carrying out his employment duties.
In 2018 and 2019, ML has provided John with a car with ML paying all of the operating costs of
the car. John uses the car exclusively for personal travel.
On January 2, 2020, ML has indicated to John that, as an alternative to continuing to provide the
car for him, they will sell the car to him at its current fair market value of $20,000. If he chooses
to purchase the car, ML will no longer pay the operating costs.
John expects that, whether he chooses to purchase the car or not, he will use the car for two
more years, 2020 and 2021. If he purchases the car, the estimated sales price at the end of
these two years would be $12,000. He expects to drive the car about 40,000 kilometres in each
of the two years.
Assume that operating costs will be $0.20 per kilometre and the prescribed operating cost ben-
efit will be $0.28 per kilometre throughout both years.
John’s combined federal/provincial marginal tax rate is 48 percent.
Required: On the basis of non-discounted cash flows, advise John as to whether he should
purchase the car assuming:
A. ML purchased the car for $35,000.
B. ML purchased the car for $70,000.
Ignore GST/HST/PST considerations.

(Loans To Employees)
Ms. Teresa Monson is employed by Elmwood Inc. She has asked the employer for a $300,000
interest free loan that will be used to acquire a summer cottage in Huntsville, Ontario. The cot-
tage will be used exclusively as a recreational property. As she is a highly valued employee,
Elmwood Inc. is considering her request.

Ms. Monson can acquire a regular mortgage at a rate of 4.5 percent. Assume that the relevant
prescribed rate is 2 percent for all periods that the employee loan will be outstanding.
Ms. Monson’s tax rate on any additional income is 46 percent. Elmwood Inc. has alternative
investment opportunities that earn a before tax rate of 7 percent. Elmwood Inc. is subject to a
tax rate of 28 percent on additional amounts of income.
Required: Evaluate Ms. Monson’s suggestion of providing her with an interest free loan in lieu
of salary from the point of view of the cost to Elmwood Inc.

(Employee Stock Options)
During 2018, Ms. Sara Wu’s employer, Imports Ltd., granted her stock options that allowed her
to acquire 12,000 shares of the company’s common stock at a price of $22 per share. At this
time, the shares have a fair market value of $20 per share.
On June, 1, 2019, Ms.Wu exercises all of these options. At this time, Imports Ltd. shares have
a fair market value of $31 per share.
On January 31, 2020, Ms.Wu sells the 12,000 Imports Ltd. shares at a price of $28 per share.
Required: For each of the following Cases, calculate the tax consequences of the transactions
that took place during 2018, 2019, and 2020 on both the Net Income For Tax Purposes and the
Taxable Income of Ms. Wu. Where relevant, identify these effects separately.
Case A Imports Ltd. is a public company.
Case B Imports Ltd. is a Canadian controlled private corporation.

Ms. Patricia Martin is employed by a Canadian public company. In 2018, she was given options
to acquire 1,500 of the company’s shares at a price of $45 per share. At this time the shares are
trading at $47 per share.
During 2019, Patricia exercises all of the options. At this time, the shares are trading at
$50 per share.
During 2020, Patricia sells the shares for $55 per share.
Required:
A. Indicate the tax effect of the transactions that took place during each of the years 2018,
2019, and 2020. Your answer should include the effect on both Net Income For Tax Purposes
and Taxable Income. Where relevant, identify these effects separately.
B. How would your answer change if the shares had been trading at $44 per share at the time
that the options were issued in 2018?
C. How would your answer change if Patricia’s employer were a Canadian controlled private
company?


(Employment Income - No Commissions)
For the last three years, Sam Jurgens has been employed in Halifax as a loan supervisor for
Maritime Trust Inc. Maritime Trust is a large public company and, as a consequence, Mr. Jurgens
felt that he did not have the opportunity to exhibit the full range of his abilities. To correct this
situation, Sam decided to accept employment in Toronto effective July 1, 2020, as the general
manager of Bolten Financial Services, a Canadian controlled private corporation specializing in
providing financial advice to retired executives.
In April 2020, prior to leaving Maritime Trust, Mr. Jurgens exercised options to purchase 5,000
shares of the public company’s stock at a price of $15 per share. At the time the Maritime Trust
options were granted, the shares were trading at the option price of $15 per share. At the time
that he exercised these options, the shares were trading at $16 per share. He is still holding
these shares on December 31, 2020.
Mr. Jurgens had an annual salary at Maritime Trust of $105,000, while in his new position in
Toronto, the salary is $90,000 per year. However, he has the option of acquiring 1,000 shares
per year of Bolten stock at a price of $20 per share. On July 1, when he was granted the option,
Bolten stock had a fair market value of $14 per share. On December 1, 2020, when the Bolten
stock has a fair market value of $22 per share, Mr. Jurgens exercises these options and acquires
1,000 shares. It is his intent to hold these shares for an indefinite period of time.
Because there is extensive travel involved in the position with Bolten Financial Services, the
company has provided Mr. Jurgens with a $40,000 company car. Between July 1 and Decem-
ber 31, 2020, Mr. Jurgens drove this car a total of 25,000 kilometres, of which 15,000 kilo-
metres were clearly related to his work with Bolten Financial Services. The operating costs
associated with the car for this period, all of which were paid for by the company, amount to
$5,000. Because of extensive repairs resulting from a manufacturer’s recall, the car had to be
returned to the company for the months of October and November 2020.
At the time of his move to Toronto, Bolten Financial Services provided Mr. Jurgens with a
$200,000 home relocation loan to purchase a personal residence near the centre of town. No
interest was charged on this loan.
During the year, Mr. Jurgens earned $15,000 in interest and received $45,000 in dividends from
taxable Canadian corporations.
Assume that the relevant prescribed rate through all of 2020 is 2 percent.
Required: Compute Sam Jurgens’ minimum net employment income for the year ending
December 31, 2020.

(Employment Income - Simple)
Ms. Sarah Kline is a copy editor for a major Canadian publisher. Her gross salary for the year end-
ing December 31, 2020, is $73,500. For the 2020 taxation year, Ms. Kline’s employer withheld the
following amounts from her income:
Federal And Provincial Income Taxes $26,000
Registered Pension Plan Contributions 2,400
Contributions To Group Disability Plan 175
Ms. Kline’s employer made a $2,400 matching contribution to her registered pension plan and a
$200 matching contribution for the group disability insurance.

Other Information:
1. During 2020, Ms. Kline is provided with an automobile that has been leased by her employer.
The lease payments are $700 per month, an amount that includes a $50 monthly payment
for insurance. The car is used by her for 11 months of the year and, during the month of
non-use, she is required to return the vehicle to her employer’s premises. During 2020, she
drives it a total of 40,000 kilometres. Of this total, 37,000 kilometres were for travel required
in pursuing the business of her employer, and the remainder was for personal use. The
operating costs of the car totaled $5,200 for the year and were paid by her employer. She
reimbursed her employer $.30 per kilometre for her personal use of the automobile.
2. During 2020, Ms. Kline was hospitalized. The disability plan that provides periodic benefits
to compensate for lost employment income paid her benefits of $1,800 during this period.
Ms. Kline began making contributions to this plan in 2019 and paid $225 for that year.
3. Ms. Kline paid dues to her professional association in the amount of $1,650 for the year.
4. Ms. Kline was given options to buy 200 shares of her employer’s publicly traded stock at a
price of $50 per share two years ago. At the time the options were issued, the shares were
trading at $50 per share. On June 6, 2020, Ms. Kline exercises the options. At the time of
exercise, the shares are trading at $70 per share. She is still holding the shares on Decem-
ber 31, 2020.
Required: Calculate Ms. Kline’s minimum net employment income for the year ending
December 31, 2020. Ignore all GST and PST considerations.

(Employment Income With Commissions)
Ms. Sandra Firth is a commission salesperson who has been working for Hadley Enterprises,
a Canadian public corporation, for three years. During the year ending December 31, 2020, her
gross salary, not including commissions or allowances, was $72,000. Her commissions for
the year totaled $14,000. The following amounts were withheld by Hadley Enterprises from
Ms. Firth’s gross salary:
Federal and provincial income taxes $22,000
Registered pension plan contributions (Note One) 3,200
Payments for group disability insurance (Note Two) 250
Payments for personal use of company car (Note Three) 2,400
Payments for group term life insurance (Note Four) 450
Interest on home purchase loan (Note Five) 3,000
Note One Hadley Enterprises made a matching $3,200 contribution to Ms. Firth’s registered
pension plan.
Note Two Ms. Firth is covered by a comprehensive disability plan, which provides periodic
benefits during any period of disability to compensate for lost employment income. Prior to
2020, Hadley Enterprises paid all of the $500 per year premium on this plan. However, as of
2020, Ms. Firth is required to pay one-half of this premium, the $250 amount withheld from her
gross salary. During 2020, Ms. Firth was hospitalized for the month of March. For this period, the
disability plan paid her $500 per week, for a total of $2,000.
Note Three Hadley Enterprises provides Ms. Firth with a Lexus that was purchased in
2019 for $58,000. During 2020, she drove the car 92,000 kilometres, 7,000 of which were
personal in nature. Ms. Firth paid all of the operating costs of the car, a total of $6,200 for
the year ending December 31, 2020. However, the company provides her with an annual

allowance of $7,200 to compensate her for these costs. While Ms. Firth was hospitalized
during the month of March (see Note Two), her employer required that the car be returned
to their premises.
Note Four Ms. Firth is covered by a group term life insurance policy that pays her
beneficiary $160,000 in the event of her death. The 2020 premium on the policy is $1,350,
two-thirds of which is paid by her employer.
Note Five On January 1, 2020, the company provided Ms. Firth with a $400,000 loan to
assist with the purchase of a new residence. The loan must be repaid by December 31,
2020. All of the interest that is due on the loan for 2020 is withheld from Ms. Firth’s 2020
salary. Assume that during all of 2020, the prescribed rate was 2 percent.
Other Information:
1. At Christmas, the company gives all of its employees a mini iPad. Each mini iPad costs the
company $350, including all applicable taxes. The company deducts this amount in full in its
corporate tax return.
2. During 2019, Ms. Firth received stock options from Hadley to acquire 1,000 shares of its
common stock. The option price is $5.00 per share and, at the time the options are issued,
the shares are trading at $4.50 per share. In June 2020, the shares have increased in value
to $7.00 per share and Ms. Firth exercises her options to acquire 1,000 shares. She is still
holding them at the end of the year and has no intention of selling them.
3. The company provides Ms. Firth with a membership in the Mountain Tennis Club. The cost of
this membership for the year is $2,500. During the year, Ms. Firth spends $6,500 entertaining
clients at this club. The company does not reimburse her for these entertainment costs.
4. Ms. Firth had travel costs related to her employment activities as follows:
Meals $1,300
Lodging 3,500
Total $4,800
Her employer provides her with a travel allowance of $300 per month ($3,600 for the year),
which is included on her T4 for the year.
Required: Calculate Ms. Firth’s minimum net employment income for the year ending
December 31, 2020. Provide reasons for omitting items that you have not included in your
calculations. Ignore any GST or PST implications.

(Employment Income With Commissions, Car CCA)
Mr. Jones is a salesperson handling a line of computer software throughout Western Canada.
During 2020, he is paid a salary of $25,800 and receives sales commissions of $47,700. He does
not receive an allowance from his employer for any of his expenses. During the year, Mr. Jones
made the following employment-related expenditures:
Airline Tickets $ 2,350
Office Supplies And Shipping Costs 415
Purchase Of Laptop Computer 2,075
Client Entertainment 1,750
Cost Of New Car 24,000
Operating Costs Of Car 7,200

The new car was purchased on January 5, 2020, and replaced a car that Mr. Jones had leased
for several years. During 2020, Mr. Jones drove the car a total of 50,000 kilometres, of which
35,000 kilometres were for employment-related purposes. The maximum capital cost allowance
for the car (100 percent) is $10,800.
In addition to expenditures to earn employment income, Mr. Jones has the following additional
disbursements:
Alberta Blue Cross Medical Insurance Premiums $435
Group Life Insurance Premiums 665
Mr. Jones indicates that he regularly receives discounts on his employer’s merchandise and,
during the current year, he estimates that the value of these discounts was $1,300.
One of the suppliers of his employer paid $2,450 to provide Mr. Jones with a one week vacation
at a northern fishing lodge.
Required: Determine Mr. Jones’ net employment income for the 2020 taxation year. Ignore all
GST and PST implications.

(Commission Income And Work Space In Home)
Mr. Worthy is a commissioned salesperson and has asked for your assistance in preparing his
income tax return for the current year. He has provided you with the following information:
Employment Income
Salary $65,000
Commissions $11,000
Telephone Charges
Monthly Charge For Residential Line $ 250
Long Distance To Clients
From Work Space In Home 400
Cellular Phone Airtime To Clients 800 $ 1,450
Office Supplies And Postage At Home Office $ 295
Cost of Tickets To Basketball Games With Clients $ 2,550
Travel Expenses
Car Operating Costs $2,700
Meals 900
Hotels 2,850 $ 6,450
Capital Cost Allowance On Car (100%) $ 2,450
Cost Of Maintaining Work Space In The Home
(Based On A Proportion Of Space Used)
House Utilities $ 485
House Insurance 70
House Maintenance 255
Capital Cost Allowance - House 750
Capital Cost Allowance - Office Furniture 475
Mortgage Interest 940
Property Taxes 265 $ 3,240
Interest
On Loan To Buy Office Furniture $1,700
On Loan To Buy Car 2,300 $ 4,000

Mr. Worthy’s car was purchased, used, several years ago for $28,000. Twenty percent of the
milage on the car is for personal matters. He is required by his employer to maintain an office
in his home and is eligible to deduct work space in the home costs. Mr. Worthy has received no
reimbursement from his employer for any of the amounts listed.
Required: Ignore GST and PST implications in your solutions.

A. Calculate Mr. Worthy’s minimum net employment income for the current year.
B. Assume Mr. Worthy had only $4,000 in commission income in addition to his $65,000 salary.
Calculate Mr. Worthy’s minimum net employment income for the current year.

(Comprehensive Employment Income)
Mitch Lesner graduated from the University of Alberta in early 2020 at the age of 28. He imme-
diately applied for a number of jobs and accepted a position as a financial planner in the Ottawa
office of Oxford Associates Ltd. Oxford Associates Ltd. is a large Canadian controlled private
corporation (CCPC) employing more than 200 people.
Prior to accepting employment with Oxford Associates, Mitch had lived in Red Deer, Alberta. Once
he had signed the contract with Oxford Associates, plans were made to sell the house he owned
in Red Deer. Unfortunately, the home remained unsold when he moved on March 8, 2020. It was
sold in late May 2020 for $125,000. He had purchased the home several years before for $147,000.
He arrived in Ottawa on March 16 and moved into an apartment he had rented on a monthly
basis until he could arrange to purchase a home. Rent payments were required from April 1.
Mitch began work on April 1, 2020, and eagerly awaited the arrival of his long-time girlfriend,
Janice Masters, from Alberta. Shortly after her arrival in Ottawa, Mitch and Janice were married
on November 29, 2020. Mitch had purchased a house just outside of Ottawa for $235,000 that
they moved into on December 1, 2020.
Mitch’s new job requires him to meet with existing and prospective clients outside of regular
office hours and, at times, on weekends. As a result, Oxford Associates will sign form T2200 stat-
ing Mitch is required to pay for certain employment expenses without reimbursement and use a
portion of his home for work. He has set aside a small room in his rented apartment that is used
exclusively to meet with clientele. Mitch is also provided with an automobile to use in his work.
Mitch is compensated by salary with a bonus and stock option arrangement. The bonus is based
on overall company profits. The stock option is available to all employees depending upon level
of service and overall job evaluation.
Other Information:
1. Given Mitch’s high grades at the University of Alberta, Oxford Associates offered Mitch
$10,000 to convince him to sign a five year employment contract. After Mitch accepted, he
received the cheque in February 2020. During the period April 1, 2020, through December
31, 2020, Mitch earned salary of $63,700. Of these earnings, $62,550 was paid during this
period as Oxford Associates holds back one week’s pay. The company withheld the follow-
ing amounts from his salary:
Income Taxes $11,400
CPP 2,898
EI 856
RPP Contributions 1,200
Payment For Personal Use Of Automobile 600

2. On December 16, 2020, a bonus of $7,450 was accrued for Mitch. Mitch received $2,000
of this bonus on December 21, 2020, with the remainder being paid on February 17, 2021.
3. A few months into the new job Mitch became quite depressed. His employer suggested
he take advantage of the company assistance program. He went to four appointments in
October and November and felt much better. Oxford Associates paid $700 for Mitch’s coun-
seling services.
4. Oxford Associates provides group medical coverage to all of its employees. The premiums
paid by Oxford Associates on Mitch’s behalf cost $410.
5. Oxford Associates contributed $1,200 on Mitch’s behalf to the company’s RPP.
6. Mitch is a Certified Financial Planner and paid $785 in professional dues in 2020. Oxford
Associates’ policy is to reimburse 80 percent of such annual professional dues. Oxford
Associates reimbursed him $628 in November 2020.
7. When Mitch was married in November he received non-cash wedding gifts valued at
$850. Half of the amount was contributed by his employer and the balance from other
employees.
8. Oxford Associates discovered years ago that many existing clients frequent certain recre-
ational and sporting clubs. To encourage contacts with potential clients, employees have
their choice among five such clubs. Since Mitch enjoys squash, he chose a free member-
ship at a local squash club. The annual membership fee is $915.
9. Oxford Associates reimbursed Mitch for 80 percent of the $22,000 ($147,000 - $125,000)
loss that he experienced on the sale of his Red Deer home.
10. Mitch had $35,000 for a down payment on his new Ottawa home. Since he had no previous
work experience, the banks were reluctant to provide him a mortgage at favourable terms.
His employer stepped in and agreed to an interest free housing loan of $200,000 beginning
on December 1, 2020. Mitch agreed to reduce his salary slightly with respect to this benefit.
The loan requires annual payments of $7,500 due at the end of November beginning in 2021.
The loan is required to be paid if Mitch dies, sells the home, or terminates his employment.
Assume that the prescribed interest rates for such benefits are 2 percent in each of the first
two quarters of 2020 and 1 percent in the third and fourth quarters.
11. Oxford instituted a stock option plan for its employees in 2019. The plan eligibility requires
six months of service. Employees are permitted to acquire a limited number of option
shares at 20 percent below their fair market value on either May 1 or November 1. The
company hires valuators to determine the fair market value at each of those dates. Mitch
acquires 200 shares on November 1, 2020, for $12,800. Low on cash and wanting to buy
Janice a nice wedding ring, he is forced to sell 80 of the shares. He sells them on Decem-
ber 16, 2020, for $8,960.
12. Oxford Associates has an arrangement with a local dealership to lease a minimum number
of new automobiles each year at favourable rates. Mitch receives his leased automobile
May 1, 2020. It has 162 kilometres on it when it is received. The odometer reads 19,414 kilo-
metres on December 31, 2020. Mitch estimates that he drove 5,198 kilometres for personal
purposes, including drives to and from home to the office. Oxford Associates pays monthly
lease payments (including HST) of $430. The cost of gas, oil, insurance, repairs and mainte-
nance, and other charges total $2,175 for 2020. Oxford Associates requires each employee
provided with an automobile to pay $75 each month for the personal use of the automobile,
which is withheld directly from their pay.
13. Mitch prepared a separate room in his apartment to be used exclusively for a home office.
He used the office space between June 1 and November 30, 2020. A home office was
not ready in his newly purchased home until February 2021. The apartment office space is

exactly 100 square feet. The total apartment space is 1,176 square feet. Home office-related
costs are as follows:
Monthly Rent $ 960
Monthly Phone Line Charge (April to November) 41
Employment-Related Long Distance Calls (June to November) 74
Total Electricity Charge (March 16 to November 30) 870
Property Insurance (March 16 to November 30) 175
Paint For Apartment 253
Office Furniture 1,344
Computer Purchase 1,739
Stationery And Office Supplies Purchased 129
14. Mitch received an allowance of $250 per month for six months to cover the costs of main-
taining an office in his home.
Required: Determine Mitch’s net employment income for the year 2020. Provide explanations
for all amounts, including reasons for omitting items not included in your calculations.

SSS Problem Three–2


(Bonus Arrangements)
Mr. Carl Lange is the president of Lange Enterprises Inc., a Canadian controlled private company.
The company has a September 30 year end. On September 30, 2021, the company declares a
bonus of $175,000, payable to Mr. Lange.
Required: For each of the following cases, indicate the taxation year in which the company can
deduct the bonus, as well as the taxation year in which Mr. Lange will have to include it in his
taxable income.
Case A The bonus is paid on October 1, 2021.
Case B The bonus is paid on January 31, 2022.
Case C The bonus is paid on July 30, 2022.
Case D The bonus is paid on January 31, 2025.

Three employees of the Cancar Company were given the use of company cars on January 1 of the
current year. The three cars are identical. Each car was driven 16,000 kilometres during the year
and the operating costs were $2,400 for each car during the year, all of which were paid by the
company. When the car is not being used by the employee, the company requires that it be
returned to its premises.
Required: Ignore all GST/PST/HST implications. For each of the following cars, calculate the
minimum taxable benefit to the employees for the current year ending December 31.
Car A is purchased for $30,000. It is used by Aaron Abbott for the whole year. He drives
it for personal purposes for a total of 9,000 kilometres.
Car B is leased for $635 per month. It is used by Babs Bentley for 11 months of the year.
She drives it for personal purposes for a total of 6,000 kilometres and pays Cancar
Company $500 for the use of the car.
Car C is purchased for $30,000. It is used by Carole Cantin for 10 months of the year.
She drives it for personal purposes for a total of 7,000 kilometres.


(Loans To Employees)
Eileen Lee is an extremely successful computer salesperson living and working in Hearst, Ontario,
who is unhappy with her current employer. She is discussing a compensation package with her
future employer, HER Ltd., a very profitable Canadian controlled private corporation.
As Ms. Lee’s current and anticipated investment income place her in the 51 percent income tax
bracket, she is very interested in finding ways in which she can be compensated without incurring
the same amount of taxation as would be assessed on an equivalent amount of salary.
Ms. Lee is contemplating a major cash outlay. She plans to completely renovate a commercial
property that she owns. She had been planning to obtain a loan of $100,000 at a 5 percent rate in
order to finance the renovations. She has suggested that it might be advantageous for the
company to provide her with an interest free loan of $100,000 as part of her compensation.
Because she will be using the loan for income producing purposes, any interest on the loan will be
deductible to Ms. Lee.
HER Ltd. is able to invest funds at a before tax rate of 10 percent. It is subject to taxation at a
28 percent rate. Assume that the relevant prescribed rate is 2 percent.
Required: Evaluate, from the point of view of the cost to the company, Ms. Lee’s suggestion of
providing her with an interest free loan in lieu of sufficient salary to carry a commercial loan at the
rate of 5 percent. Assume that the cost of the renovations will be fully deductible in the year in
which they are made.

Ms. Marian Bytech is an employee of Merlin Industries Ltd. During 2019, Ms. Bytech was granted
options to acquire 200,000 of her employer’s shares at a price of $15 per share.
On August 1, 2020, all of the options are exercised. On this date, the Merlin Industries shares have
a fair market value of $22 per share.
On November 1, 2021, Ms. Bytech sells all of her Merlin Industries shares at $28 per share.
Required: Indicate the tax effect on Ms. Bytech with respect to the granting of the options, their
exercise, and the sale of the shares under each of the following independent assumptions. Your
answer should include the effect on both Net Income For Tax Purposes and Taxable Income.
Where relevant, identify these effects separately.
A. Merlin Industries Ltd. is a Canadian controlled private corporation. At the time the options were
granted, the company’s shares had a fair market value of $14 per share.
B. Merlin Industries Ltd. is a Canadian controlled private corporation. At the time the options were
granted, the company’s shares had a fair market value of $18 per share.
C. Merlin Industries Ltd. is a Canadian public company. At the time the options were granted, the
shares were trading at $15 per share.
D. Merlin Industries Ltd. is a Canadian public company. At the time the options were granted, the
shares were trading at $18 per share.


(Employment Income)
Mrs. Vera Smiles is a sales representative for a Canadian controlled private corporation that
manufactures office furniture. Her gross salary for the year ending December 31, 2020, is $53,000
and, in addition, she earned commissions of $34,500. For the 2020 taxation year, Mrs. Smiles’
employer withheld the following amounts from her income:
Federal And Provincial Income Taxes $22,400
EI Premiums 856
CPP Contributions 2,898
Mrs. Smiles’ employer made a $3,200 matching contribution to her registered pension plan and a
$236 matching contribution to her group disability insurance.
Other Information:
1. During 2020, Mrs. Smiles is provided with an automobile that has been leased by her
employer. The lease payments are $1,220 per month, an amount that includes a $127 per
month payment for insurance. The car is used by her for 10 months of the year and, during the
period of non-use, she is required to return the car to her employer’s premises. During 2020,
she drives it a total of 67,000 kilometres. Of this total, 63,000 kilometres were for travel
required in pursuing the business of her employer, and the remainder was for personal use.
She reimbursed her employer $1,400 for her personal use of the automobile.
2. During 2020, Mrs. Smiles was hospitalized for a month. The disability plan that provides
periodic benefits to compensate for lost employment income paid her benefits of $2,650 during
this period. Mrs. Smiles began making contributions to this plan in 2019 and paid $260 for that
year.
3. On July 1, 2020, Mrs. Smiles received a $50,000 loan from her employer. The loan requires
annual interest payments at a rate of 1 percent and Mrs. Smiles pays the interest for 2020 on
January 18, 2021. Assume that at the time the loan was granted and for the remainder of the
year, the prescribed rate was 2 percent. The loan is still outstanding at the end of the year.
4. Mrs. Smiles was given options to buy 200 shares of her employer’s stock at a price of $32 per
share three years ago. At the time the options were issued, the shares had a fair market value
of $30 per share. On June 1, 2020, Mrs. Smiles exercises the options. At the time of exercise,
the shares had a fair market value of $45 per share. She does not plan to sell the shares for at
least two years.
5. During the year, Mrs. Smiles traveled extensively on business. She had travel costs of $3,365
in air fares, $4,880 in travel lodging, and $2,450 in meals while on the road. She also spent
$2,720 to entertain clients. Her employer reimbursed her fully for these costs on presentation of
the receipts.
Required: Calculate Mrs. Smiles’ minimum net employment income for the year ending
December 31, 2020. Provide reasons for omitting items that you have not included in your
calculations. Ignore all GST and PST considerations.

Solution to SSS Problem Three–2

The required information for the four Cases included in this problem is as shown in the following
table:
Deduction Inclusion
Lange Enterprises Inc. Carl Lange
Year Ending September 30 Calendar Year
Case A 2021 2021
Case B 2021 2022
Case C 2022 2022
Case D 2021 2021
In Case A, the bonus is deducted when accrued because it is paid within 180 days of Lange
Enterprises’ 2021 year end. It is taxed when received.
In Case B, the bonus is deducted when accrued because it is paid within 180 days of Lange
Enterprises’ 2021 year end. It is taxed when received.
In Case C, the bonus is not paid within 180 days of Lange Enterprises’ year end. As a conse-
quence, it cannot be deducted until the year ending September 30, 2022. However, as it is paid
within three years of Lange Enterprises’ 2021 year end it is not a salary deferral arrangement. This
means it does not have to be included in Mr. Lange’s Taxable Income until 2022.
In Case D, the bonus is not paid until more than three years after the end of the calendar year in
which Mr. Lange rendered the services. This makes it a salary deferral arrangement, resulting in
Mr. Lange having to include it in his 2021 Taxable Income. Lange Enterprises will deduct the bonus
in the fiscal year ending September 30, 2021.

With respect to Cars B and C, employment-related usage was more than 50 percent of total usage
and, as a consequence, there is an available reduction in the standby charge, as well as an
alternative calculation of the operating cost benefit. For Car A, the employment-related use is less
than 50 percent and, as a consequence, there is no alternative calculation of either the standby
charge or the operating cost benefit.
Car A
Standby Charge [(2%)($30,000)(12)] $7,200
Operating Cost Benefit [(9,000)($0.28)] 2,520
Total Taxable Benefit $9,720

Car B
Standby Charge [(2/3)(11)($635)(6,000/18,337*)] $1,524

Operating Cost Benefit - Lesser Of:
• [(6,000)($0.28)] = $1,680
• [(1/2)($1,524)] = $762 762
Payment For Personal Use ( 500)
*[(11)(1,667)]
Car C
Standby Charge [(2%)($30,000)(10)(7,000/16,670*)] $2,519

• [(7,000)($0.28)] = $1,960
• [(1/2)($2,519)] = $1,260 1,260
*[(10)(1,667)]

Approach
The appropriate comparison in evaluating the interest free loan arrangement would be to determine
the cost to the company of providing the loan, and then to compare this amount with the cost of
providing an equivalent benefit in the form of straight salary. The following analysis calculates the
company’s lowest cost route to providing Ms. Lee with the financing required, assuming she is not
a shareholder.
Cost Of Providing For Interest Payments On Commercial Loan

Ms. Lee can borrow on a loan at a rate of interest of 5 percent. This means that the annual interest
payments on $100,000 would amount to $5,000.
Because the interest on the loan can be deducted, there would be no tax consequences associated
with receiving this amount of additional salary. Given this, a $5,000 increase in salary will be
sufficient to carry the loan.
The cost of the additional salary to the company would be calculated as follows:
Salary Increase $5,000
Reduction In Corporate Taxes (At 28 Percent) ( 1,400)
Net Cost To Company - Additional Salary $3,600
Cost Of Providing Interest Free Loan

Ms. Lee would be assessed a taxable benefit on the loan of $2,000 [(2%)($100,000)] for the first
year. However, under ITA 80.5, this would be deemed interest paid. As she is using the funds
provided to produce rental income, the full amount would be deductible, resulting in no net change
in taxes.
Given this, the analysis of this alternative only requires looking at the cost of the loan to the
company:

Lost Earnings On Funds Loaned (At 10 Percent) 10,000

Corporate Taxes On Imputed Earnings (At 28 Percent) ( 2,800)
Net Cost To Company - Loan $7,200
Conclusion
On the basis of the preceding analysis, it can be concluded that the company should provide an
additional $5,000 in salary rather than providing Ms. Lee with an interest free loan of $100,000. This
alternative results in a net cost to the company that is $3,600 ($7,200 - $3,600) lower than the loan
option. The major factor that pushed the outcome in this direction is the high rate of return that HER
expects on invested funds.

Case A
The required information under the assumption that Merlin Industries Ltd. is a Canadian controlled
private corporation is as follows:
• Year Of Granting - No tax effect.
• Year Of Exercise - No tax effect.
• Year Of Sale - As the option price was greater than the fair market value of the shares at the
time the options were issued, the ITA 110(1)(d) deduction can be taken. The results for this
year would be as follows:
Fair Market Value At Exercise [(200,000)($22)] $4,400,000
Cost of Shares [(200,000)($15)] ( 3,000,000)
Employment Income $1,400,000
Taxable Capital Gain [(200,000)($28 - $22)(1/2)] 600,000
Increase In Net Income For Tax Purposes $2,000,000
Deduction Under ITA 110(1)(d) [(1/2)($1,400,000)] ( 700,000)
Increase In Taxable Income $1,300,000
Case B
As the option price at the time of the grant is less than the fair market value of the shares on that
date, no deduction is available under ITA 110(1)(d). Further, as Ms. Bytech has not held the shares
for two years, no deduction is available under ITA 110(1)(d.1). Given this, the required information
under the assumption that Merlin Industries Ltd. is a Canadian controlled private corporation is as
follows:
• Year Of Exercise - No tax effect.
• Year Of Sale - The tax effects would be as follows:
Cost of Shares [(200,000)($15)] ( 3,000,000)
Employment Income $1,400,000
Taxable Capital Gain [(200,000)($28 - $22)(1/2)] 600,000
Increase In Net Income For Tax Purposes $2,000,000
Deduction Under ITA 110(1)(d) N/A
Deduction Under ITA 110(1)(d.1) N/A

Case C
The required information under the assumption that Merlin Industries Ltd. is a Canadian public
company is as follows:
• Year Of Exercise - As the option price was greater than the fair market value of the shares at
the time the options were issued, the ITA 110(1)(d) deduction can be taken. The results for this
year would be as follows:
Cost of Shares [(200,000)($15)] ( 3,000,000)
Employment Income
= Increase In Net Income For Tax Purposes $1,400,000
Deduction Under ITA 110(1)(d) [($1,400,000)(1/2)] ( 700,000)
Increase In Taxable Income $ 700,000
• Year Of Sale - The taxable capital gain would be both the increase in Net Income For Tax
Purposes and the increase in Taxable Income for the year. The taxable capital gain would be
calculated as follows:
Proceeds Of Disposition [(200,000)($28)] $5,600,000
Adjusted Cost Base [(200,000)($22)] ( 4,400,000)
Capital Gain $1,200,000
Inclusion Rate 1/2
Taxable Capital Gain $ 600,000
Case D
As the option price at the time of the grant is less than the fair market value of the shares on that
date, no deduction is available under ITA 110(1)(d). Further, as Merlin Industries Ltd. is a public
company, no deduction could have been available under ITA 110(1)(d.1). Given this, the required
information is as follows:
• Year Of Exercise - The tax effects would be as follows:

Cost of Shares [(200,000)($15)] ( 3,000,000)
Employment Income
= Increase In Net Income For Tax Purposes $1,400,000
Deduction Under ITA 110(1)(d) N/A
• Year Of Sale - The taxable capital gain would be both the increase in Net Income For Tax
Purposes and the increase in Taxable Income for the year. The taxable capital gain would be
Proceeds Of Disposition [(200,000)($28)] $5,600,000
Adjusted Cost Base [(200,000)($22)] ( 4,400,000)
Inclusion Rate 1/2


Mrs. Smiles’ net employment income for the year would be calculated as follows:
Gross Salary $53,000

Commissions 34,500
Registered Pension Plan Contributions ( 3,200)
Contributions To Group Disability Plan (Note One) Nil
Disability Insurance Benefit (Note One) 2,178
Automobile Benefit (Note Two) 1,222
Loan Benefit (Note Three) 250
Stock Option Benefit (Note Four) Nil
Reimbursed Travel Costs (Note Five) Nil
Net Employment Income $87,950
Note One The contributions to the group disability plan are not deductible, but can be applied
against the $2,650 received under the plan during the year. Since the employer’s contributions
to this plan are not a taxable benefit, the $2,650 in benefits received must be included in
employment income. However, this benefit can be reduced by the $472 ($260 + $212) in total
contributions that she has made in 2019 and 2020.
Note Two Based on the fact that Mrs. Smiles’ employment-related usage is more than
50 percent, the automobile benefit is calculated as follows:
Standby Charge [(2/3)(10)($1,220 - $127)(4,000/16,670*)] $1,748

• [(4,000)($0.28)] = $1,120
• [(1/2)($1,748)] = $874 874
Total Before Payments $2,622
Payments For Personal Use ( 1,400)
Taxable Benefit $1,222
*[(10)(1,667)]
Note Three The benefit on the low interest loan would be calculated as follows:
[($50,000)(2% - 1%)(2/4)] = $250
While most students will use the quarterly calculation, the use of actual days would result in the
following acceptable alternative:
[($50,000)(2% - 1%)(184 ÷ 365)] = $252
Note Four As a Canadian controlled private corporation is involved and she is still holding the
shares, Mrs. Smiles does not recognize an employment income inclusion in 2020.
Note Five Since all of her travel and entertainment costs were reimbursed based on actual
receipts, there is no effect on her income. Her employer will have to apply the 50 percent limit
on meals and entertainment to the reimbursed costs.

Self Study Problem Four - 2

(Tax Payable At Alternative Rates)
Barbra and Sally Hines are common-law partners. Neither person has any tax credits other than
the personal or common-law partner credit.
This problem will consider three different Cases involving alternative levels of 2020 Taxable
Income for each individual as follows:
Case One Case Two Case Three

Barbra’s Taxable Income $ 42,000 $ 111,000 $222,000
Sally’s Taxable Income 180,000 111,000 Nil
Combined Taxable Income $222,000 $222,000 $222,000
Required: For each Case, determine the combined federal Tax Payable for Barbra and Sally
Hines for the 2020 taxation year.

(Personal Tax Credits - 5 Cases)
In each of the following independent Cases, determine the maximum amount of 2020 per-
sonal tax credits, including transfers from a spouse or dependant, that can be applied against
federal Tax Payable by the taxpayer. Ignore, where relevant, the possibility of pension income
splitting.
A calculation of Tax Payable is NOT required, only the applicable credits.
1. Leonard Wilkins has Net Income For Tax Purposes of $104,300, all of which is rental income.
His spouse has Net Income For Tax Purposes of $8,720. Their daughter is 13 years old, lives
with them, and has Net Income For Tax Purposes of $3,240. Their son is 24 years old and,
because of a physical disability, continues to live with them. He has no income of his own.
His disability is not severe enough to qualify for the disability tax credit.
2. Pete Webb has Net Income For Tax Purposes of $74,200, all of which is employment
income. His employer withheld the maximum EI premium and CPP contribution. He is
married to Eva Aguilar whose Net Income For Tax Purposes is $3,920. They have three
children aged 6, 10, and 12. All of the children are in good health and none of them have
income of their own.
3. Candace Hall is 78 years old and has Net Income For Tax Purposes of $69,420. This total is
made up of OAS payments of $7,400 and pension income from her former employer. Her
husband is 62 years old and has Net Income For Tax Purposes of $5,130.
4. Gladys Crawford has Net Income For Tax Purposes of $126,470, all of which is rental income.
Her husband has Net Income For Tax Purposes of $2,600. They have three children, ages 10,
14, and 20. All of these children are in good health and continue to live at home. The 20 year

old child has Net Income For Tax Purposes of $9,130. During the current year, Ms. Crawford
pays the following medical expenses:
Gladys $ 5,150
Her Spouse 4,240
10 Year Old Child 2,040
Total $23,490
5. Austin Schneider was divorced from his wife several years ago. He has custody of their four
children, ages 5, 8, 11, and 14. The children are all in good health. His Net Income For Tax Pur-
poses consists of spousal support payments totaling $62,000. Only the 14 year old child had any
income for the year. The 14 year old had Net Income For Tax Purposes of $10,350 during the year.

In each of the following independent Cases, determine the maximum amount of 2020 personal
tax credits, including transfers from a spouse or dependant, that can be applied against federal Tax
Payable by the taxpayer.
1. Ms. Jones is married and has Net Income For Tax Purposes of $123,000, none of which
is employment income or income from self-employment. Her husband is currently unem-
ployed, but has interest income from investments of $3,750. Her 20 year old dependent son
attends university and lives at home. Her son has Net Income For Tax Purposes of $4,800
and does not agree to transfer his tuition credit to her.
2. Ms. Martin is 66 years old and has Net Income For Tax Purposes of $28,750. This total is
made up of OAS of $7,400, plus pension income of $21,350 from a former employer. Her
husband is 51 years old and blind. He has no income of his own. Ignore the possibility that
Ms. Martin would split her pension income with her husband.
3. Mr. Sharp has Net Income For Tax Purposes of $72,350, none of which is employment
income or income from self-employment. He lives with his common-law partner and her
three children from a previous relationship. The children are aged 13, 15, and 20. The 20 year
child is dependent because of a physical disability. However, the disability is not sufficiently
severe to qualify for the disability tax credit. Neither the common-law partner nor any of the
children have any source of income.
4. Mr. Barton was divorced two years ago and maintains a residence separate from his former
spouse. He has custody of the three children of the marriage, aged 8, 9, and 10, and receives
$2,500 per month in child support payments. Mr. Barton has Net Income For Tax Purposes
of $62,300, none of which is employment income or income from self-employment. None
of the children have any income of their own.
5. Ms. Cole has Net Income For Tax Purposes of $175,000, all of which is employment income.
Her employer has withheld and remitted the required EI and CPP amounts. She was mar-
ried on December 1, 2020. Her new husband is an accounting student with a large firm. His
salary for the period January 1 through November 30, 2020, was $33,000. For the month of
December, 2020, his salary was $3,000.
6. Mr. Smead has Net Income For Tax Purposes of $85,000, none of which is employment
income or income from self-employment. He lives in a residence that he has owned for

many years. He does not currently have a spouse or common-law partner. However, he has
custody of his 10 year old son who lives with him. Also living with him is his 68 year old
widowed mother. She has a physical infirmity. However, it is not sufficiently severe for her
to qualify for the disability tax credit. Mr. Smead’s son had no income during the year. His
mother had OAS benefits and pension income totaling $18,500 during the year.

(Individual Tax Payable - Simple)
Mr. Dennis Lane has been a widower for several years. For 2020, both his Net Income For
Tax Purposes and Taxable Income were $70,000, all of which is net employment income. Mr.
Lane’s employer withheld $10,100 in federal income taxes, $856 for Employment Insurance
premiums, and $2,933 in Canada Pension Plan contributions. Because of an error by his
employer, an overcontribution of $35 was made for the Canada Pension Plan.
Other Information:
1. Mr. Lane made political contributions to federal political parties in the amount of $450.
2. Mr. Lane has three children, aged 10, 12, and 15. They all live with him in his principal resi-
dence. His 15 year old son had Net Income For Tax Purposes of $8,200 during the year.
3. Mr. Lane paid $4,400 for hospital care for his 15 year old son. He paid no other medical
expenses during the year.
Required: Calculate Mr. Lane’s federal tax payable (refund) for 2020.

(Comprehensive Tax Payable)
Mr. John Barth has been employed for many years as a graphic illustrator in Kamloops, British
Columbia. His employer is a large publicly traded Canadian company. During 2020, his gross sal-
ary was $82,500. In addition, he was awarded a $20,000 bonus to reflect his outstanding perfor-
mance during the year. As he was in no immediate need of additional income, he arranged with
his employer that none of this bonus would be paid until 2025 year of his expected retirement.
Other Information:
For the 2020 taxation year, the following items were relevant.
1. Mr. Barth’s employer withheld the following amounts from his income:
Federal Income Tax $16,000
Employment Insurance Premiums 856
Canada Pension Plan Contributions 2,898
United Way Donations 2,000
Payments For Personal Use Of Company Car 3,600
2. During the year, Mr. Barth is provided with an automobile owned by his employer. The cost
of the automobile was $47,500. Mr. Barth drove the car a total of 10,000 kilometres during
the year, of which only 4,000 kilometres were related to the business of his employer. The
automobile was used by Mr. Barth for ten months of the year. During the other two months,
he was out of the country and he was required to leave the automobile with one of the other
employees of the corporation.
3. During the year, the corporation paid Mega Financial Planners a total of $1,500 for providing
counselling services to Mr. Barth with respect to his personal financial situation.

4. In order to assist Mr. Barth in purchasing a ski chalet, the corporation provided him with a
five year loan of $150,000. The loan was granted on October 1 at an interest rate of 1 per-
cent. Mr. Barth paid the corporation a total of $375 in interest for 2020 on January 20, 2021.
Assume that, at the time the loan was granted and throughout the remainder of the year,
the relevant prescribed rate was 2 percent.
5. Mr. Barth was required to pay professional dues of $1,800 during the year.
6. On June 6, 2020, when Mr. Barth exercised his stock options to buy 1,000 shares of his
employer’s common shares at a price of $15 per share, the shares were trading at $18 per
share. When the options were issued, the shares were trading at $12 per share. During
December 2020, the shares were sold at $18 per share.
7. Mr. Barth lives with his wife, Lynda. Lynda is blind and qualifies for the disability tax credit.
She has Net Income For Tax Purposes of $1,250.
8. His 22 year old dependent daughter, Marg, is a full time student for eight months of the year.
She has Net Income For Tax Purposes and Taxable Income of $15,300. She had withheld
from her employment income EI premiums of $242 [(1.58%)($15,300)] and CPP contribu-
tions of $620 [(5.25%)($15,300 - $3,500)]. Mr. Barth paid Marg’s tuition for 2020 of $6,300.
She has agreed to transfer the maximum tuition amount to her father.
9. Mr. Barth paid the following medical costs during the year:
For Himself $ 200
For His Wife 3,550
For Marg 720
Total $4,470
Required: Calculate, for the 2020 taxation year:

A. Marg’s minimum federal Tax Payable and any carry forward amounts available to her at the
end of the year.
B. Mr. Barth’s minimum Taxable Income and federal Tax Payable (Refund).

(Tax Payable - Simple)
Mr. Samuel Kern is an administrator for a publicly traded Canadian manufacturing company. His
gross salary for the year ending December 31, 2020, is $67,600. Mr. Kern’s employer withheld
the following amounts from his income:
Federal Income Tax $7,200
Canada Pension Plan Contributions 2,898
Mr. Kern’s employer made a matching contribution of $1,800 to his registered pension plan and
a $150 matching contribution for the group disability insurance.
Other Information:
1. Mr. Kern is provided with an automobile that has been leased by his employer. The lease
payments are $815 per month, an amount that includes all taxes and an $89 monthly pay-
ment for insurance. The total operating costs of the car were $4,600 for the year and they

were paid by the employer. The car is used by him for nine months of the year and, during
the months of non-use, it must be returned to the premises of his employer. During 2020,
he drives it a total of 32,000 kilometres. Of this total, 29,000 kilometres were for travel
required in pursuing the business of his employer and the remainder were for personal use.
He reimbursed his employer $50 per month of use for his personal use of the automobile.
2. During 2020, the disability plan provided him with benefits of $1,650 after he was injured.
Mr. Kern began making contributions to this plan in 2019 and paid $200 for that year. The
plan provides periodic benefits that compensate for lost employment income.
3. Mr. Kern was required to pay 2020 dues to his professional association in the amount of
$1,233.
4. Mr. Kern was given options to buy 200 shares of his employer’s stock at a price of $75 per
share two years ago. At the time the options were issued, the shares were trading at $70
per share. On June 1, 2020, Mr. Kern exercises the options. At the time of exercise, the
shares are trading at $83 per share. He is still holding the shares at the end of the year.
5. Mr. Kern donated $500 to the Canadian Cancer Society in 2019, but forgot to claim the dona-
tion in 2019. He has found the donation receipt in his files.
6. Mr. Kern lives with his wife and 23 year old son, David. His wife has Net Income For Tax
Purposes of $3,660. David is a full time student at university for eight months of the year
and has Net Income For Tax Purposes of $5,780. Mr. Kern has paid David’s tuition for 2020
of $6,700, and in return David has agreed to transfer the maximum tuition amount to his
father.
7. Mr. Kern paid the following medical costs:
For Himself $2,100
For His Wife 770
For David 3,260
Total $6,130
Required: Calculate, for the 2020 taxation year, Mr. Kern’s minimum Taxable Income and
federal Tax Payable (Refund). Indicate any carry forwards available to him and his dependants
and the carry forward provisions. Ignore all GST considerations.

(Comprehensive Tax Payable With Employment Income)
Ms. Marcy Van Horne is employed by a large publicly traded corporation and her 2020 salary is
$126,000. In addition to her annual salary, she received a performance bonus of $25,000, one-
half of which was paid in 2020, with the remaining one-half not due until July 1, 2021. In addition
to her salary, she earns commissions of $32,000 during 2020.
During 2020, Ms. Van Horne’s employer withheld the following amounts from her compensation:
EI Premiums $ 856
RPP Contributions 7,400
Life Insurance Premiums (Employer Makes
A Matching Contribution) 550
Ms. Van Horne is divorced and has custody of her two children. They are aged 12 and 17. The
12 year son has 2020 income of $2,500.

The 17 year old daughter is in full time attendance at a university during eight months of the year.
Ms. Van Horne pays her annual tuition of $7,000. The daughter has summer income of $4,500
and has agreed to transfer her education related credits to her mother. Also living with Ms. Van
Horne is her 68 year old father whose Net Income For Tax Purposes for 2020 totals $8,000. He
has supplemented his income for years with his casino winnings and they total $10,000 in 2020.
While he does not qualify for the disability tax credit, he has a physical infirmity that makes him
dependent on Marcy.
Other Information:
1. Ms. Van Horne is provided with an automobile by her employer. During 2020, it is driven
48,000 kilometres, of which 42,500 are employment related. The automobile is leased by
the employer at a monthly rate of $728, including GST of $30 and PST of $48. The monthly
rate also includes a payment for insurance of $50 per month. The automobile was used by
Ms. Van Horne for 11 months during 2020. She was required to return the automobile to her
employer’s garage during the month that she did not use it.
2. Ms. Van Horne incurred the following employment-related expenses during 2020:
Advertising $ 5,600
Entertainment 9,000
Meals 2,400
Hotels 8,400
Airline Tickets 3,400
Total Expenses $28,800
Ms. Van Horne’s employer reimburses all of her meal costs and one-half of her hotel bills.
No other expenses were reimbursed.
3. During 2019, Ms. Van Horne was granted options to acquire 5,000 shares of her employer’s
common shares at an option price of $25 per share. This was also the market value of the
shares at this time. During July 2020, Ms. Van Horne exercises all of the options at a point
in time when the shares were trading at $31 per share. She is still holding the shares at the
end of the year.
4. During 2020, Ms. Van Horne gives total cash of $1,800 to a variety of registered charities.
5. Also during 2020, Ms. Van Horne donates $300 to each of the three federal political parties.
6. During 2020, Ms. Van Horne pays for the following eligible medical costs:
For Herself $ 850
For Her Two Children 1,480
For Her Father 3,940
Total Medical Costs $6,270
Required:
A. Determine Ms. Van Horne’s minimum Net Income For Tax Purposes for the 2020 taxation
year.
B. Determine Ms. Van Horne’s minimum Taxable Income for the 2020 taxation year.
C. Based on your answer in Part B, determine Ms. Van Horne’s federal Tax Payable for the 2020
taxation year. Indicate any carry forwards available to her and her dependants and the carry
forward provisions. Ignore any amounts that might have been withheld by her employer or
paid in instalments.


Lydia Hines is a translator who works for a consulting firm in Ottawa. Her 2020 salary is $73,500,
from which her employer, a Canadian controlled private company, deducts maximum CPP and
EI contributions. Also deducted is an RPP contribution of $2,600. The employer makes a match-
ing contribution. Her employment compensation does not include any commission income.
Lydia’s husband, Mark, is the beneficiary of a trust. Mark’s mother was extremely wealthy and
when she died, she left her assets to a trust for her children and her grandchildren. Mark will
eventually inherit much of the estate. As a result, he no longer works for pay and devotes much
of his time to volunteer work. His 2020 Net Income For Tax Purposes is $8,600. All of this
income is from the trust.
The couple have three children aged 15, 20, and 22 who live with them. The 15 year old, Barry,
is in good health and has 2020 Net Income For Tax Purposes of $9,400 from the trust.
The 20 year old, Mary, is dependent on her family because of mental health issues. However,
she does not qualify for the disability tax credit. Her 2020 Net Income For Tax Purposes of
$3,100 is from the trust.
The 22 year old, Harry, attends university on a full time basis in Vancouver for eight months of
the year. Lydia pays his tuition of $11,300, his textbook costs of $1,250, and his residence fees of
$8,000. Harry’s 2020 Net Income For Tax Purposes of $14,100 is from the trust. He has agreed
to transfer the maximum tuition amount to Lydia.
Other Information:
1. To reward Lydia for her outstanding work, and as an incentive to stay with the company, her
employer has awarded her a bonus of $10,000. Of this total, $4,000 will be paid in 2021,
with the remaining $6,000 payable in 2024.
2. Lydia received options to purchase 200 shares of her employer’s stock at a price of $72 per
share last year. At the time the options were granted, the fair market value of the shares was
$74 per share. During May 2020, when the shares had a fair market value of $90 per share,
Lydia exercises all of these options. She is still holding these shares at the end of the year.
3. Lydia is provided with an automobile by her employer. The automobile was leased on Feb-
ruary 1, 2020, at a monthly rate of $565, a figure which includes a payment for insurance
of $75 per month. The automobile is driven a total of 36,000 kilometres, 32,000 of which
were employment related. It was available to her from February 1 to the end of the year. The
employer did not provide an automobile during the month of January.
4. During 2020, Lydia spent $5,600 on employment-related meals and entertainment with cli-
ents of her employer. Her employer reimbursed $3,200 of these costs.
5. During 2020, Lydia receives several gifts from her employer:
• As is the case for all of the company’s employees, Lydia receives a $150 gift certificate
that can be used for merchandise at a local department store.
• In recognition of her 10 years of service, Lydia receives a Visconti fountain pen she has
been coveting. The retail value of this pen is $1,000.
• At Christmas, all of the company’s employees receive a gift basket of holiday treats. The
retail value of these gift baskets is $200.
6. After years of accumulating savings and living in rental units, Lydia and Mark purchase
a residence. The cost of the house is $380,000 and, to assist with the purchase, Lydia’s
employer provides a $100,000 interest free loan. The loan was granted on May 1, 2020,
and will have to be repaid on April 30, 2025. Assume the prescribed rate is 2 percent
throughout the year 2020.

7. Because of the nature of her employment, Lydia is required to pay annual professional dues
of $350.
8. During 2020, Lydia makes her annual contribution of $2,000 to a registered charity, The No
Hope Of Salvation Army. (Lydia is an atheist.)
9. Lydia’s employer provides all employees with a health care plan. It reimburses employees
for 50 percent of all prescriptions, dental, and vision fees for the employee, the employee’s
spouse, and all children under 18 years of age. The family’s 2020 medical expenses, all of
which were paid by Lydia, were as follows:
Lydia - Prescriptions $2,500
Lydia - Botox treatments 1,400
Mark - Dentist fees for root canals (3) 7,200
Mark - Hair replacement procedures 3,700
Barry - Dentist fees, including $1,000 for a tooth replacement 2,100
Mary - Doctor fees for treatment for depression 8,400
Mary - Prescriptions 3,900
Mary - Liposuction treatment for her upper arms 4,200
Harry - Physiotherapy 1,500
Harry - Fees for prescription glasses and contact lenses 2,200
Required:
A. Determine Lydia’s minimum Net Income For Tax Purposes for the 2020 taxation year.
B. Determine Lydia’s minimum Taxable Income for the 2020 taxation year.
C. Based on your answer in Part B, determine Lydia’s federal Tax Payable for the 2020 taxation
year.

SSS Problem Four–1


In each of the following independent Cases, determine the maximum amount of 2020 personal tax
credits, including transfers from a spouse or dependant, that can be applied against federal Tax
Payable by the taxpayer.
1. Jack Brown has Net Income For Tax Purposes of $97,000, all of which is employment income.
His employer has withheld and remitted the required EI and CPP amounts. He is married to
Janice Brown whose Net Income For Tax Purposes is $7,250. They have three children aged
7, 9, and 11. All of the children are in good health. None of them have income of their own.
2. Marion Barkin was divorced from her husband several years ago. She has custody of their
three children, ages 9, 12, and 15. The children are all in good health. Her Net Income For Tax
Purposes consists of spousal support payments totaling $48,000 per year. Only the 15 year old
child had any income for the year. The 15 year old had Net Income For Tax Purposes of
$9,500 during the year.
3. John Appleton has Net Income For Tax Purposes of $86,500, none of which is employment
income or income from self-employment. His spouse has Net Income For Tax Purposes of
$5,650. Their daughter is 15 years old, lives with them, and has Net Income For Tax Purposes
of $1,550. Their son is 22 years old and, because of a physical disability, continues to live with
them. He has no income of his own. His disability is not severe enough to qualify for the
disability tax credit.
4. Sarah Pale is 67 years old and has Net Income For Tax Purposes of $52,500. This total is
made up of OAS payments and pension income from her former employer. Her husband is
62 years old and has Net Income For Tax Purposes of $4,840. Ignore the possibility of splitting
Sarah’s pension income.
5. Martin Land has Net Income For Tax Purposes of $126,420, all of which is rental income. His
wife has Net Income For Tax Purposes of $1,200. They have three children, ages 14, 16, and
19. All of these children are in good health and continue to live at home. The 19 year old child
has Net Income For Tax Purposes of $7,240. During the current year, Mr. Land pays the
following medical expenses:
Himself $ 2,450
His Spouse 3,240
Total $14,320


(Individual Tax Payable - 7 Cases)
Seven independent Cases follow. Each case involves various assumptions as to the amount and
type of income earned by Mr. Bob Barnes during 2020, as well as to other information that is
relevant to the determination of his Tax Payable. Bob’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 Bob Barnes is 52 years old, has employment income of $75,000, and makes
contributions of $4,500 to registered charities. He is not married and has no dependants.
Case 2 Bob Barnes is 58 years old and has employment income of $75,000. His
common-law partner is 53 years old and has income of $6,480. They have an adopted
son who is 19 years old and lives at home. Bob and his partner have medical expenses of
$4,300. Medical expenses for the son total $5,600. The son has Net Income For Tax
Purposes of $4,200.
Case 3 Bob Barnes is 58 years old and has income from investments of $97,000. He is
divorced and has been awarded custody of his 21 year old disabled son. The son
qualifies for the disability tax credit. He has Net Income For Tax Purposes of $8,000 and
is dependent on his father for support.
Case 4 Bob and his wife, Gabrielle, are both 67 years of age. Gabrielle is sufficiently
disabled that she qualifies for the disability tax credit. The components of the income
earned by Bob and Gabrielle are as follows:
Bob Gabrielle
Interest $ 750 $ 750
Canada Pension Plan Benefits 8,600 Nil
Old Age Security Benefits 7,400 7,400
Income From Registered Pension Plan 34,500 1,450
Total Net Income $51,250 $9,600
Case 5 Bob Barnes is 46 years old and has employment income of $162,000. His wife,
Gabrielle, is 48 years old and has Net Income For Tax Purposes of $8,400. They have a
20 year old son who lives at home. He is dependent because of a physical infirmity.
However, he is able to attend university on a full time basis for eight months during 2020.
Bob pays his tuition fees of $7,900, as well as $725 for the textbooks that he requires in
his program. The son has Net Income For Tax Purposes of $10,000. He agrees to
transfer the maximum tuition amount to his father.
Case 6 Bob Barnes is 43 years old and has rental income of $97,000. His wife died last
year. He has two children. Summer is 12, is in good health, and has no income during the
year. His son, Martin, is 15 and is physically infirm, but not sufficiently to qualify for the
disability tax credit. He has income from part time work designing websites of $7,250.

Case 7 Bob Barnes is 45 years old and has employment income of $75,000. His wife,
Gabrielle, is 37 years old and has Net Income For Tax Purposes of $4,600. They have no
children. However, they provide in-home care for Gabrielle’s father, who is 62 years old,
dependent because of a physical infirmity, and has no income of his own. His disability is
not severe enough to qualify for the disability tax credit. Also living with them is Bob’s
67 year old father. He is in good physical and mental health and has Net Income For Tax
Purposes of $18,300.
Required: In each Case, calculate Bob Barnes’ minimum federal Tax Payable for 2020. Indicate
any carry forwards available to him and his dependants and the carry forward provisions. Ignore
any amounts Bob might have had withheld or paid in instalments.

Ms. Angelina Bradmore is a very successful salesperson for a large publicly traded company. For
2020, her base salary is $250,000. In addition, she received commissions totaling $12,000 during
the year. For 2020, she also received a bonus of $32,000, one-half of which was paid during 2020,
with the remainder due on January 31, 2021.
During 2020, her employer withholds the following amounts from her salary:
Registered Pension Plan Contributions $7,500

EI Premiums 856
Contributions To The Local United Way 1,200
Life Insurance Premiums
(Employer Makes Matching Contribution) 460
Ms. Bradmore is divorced and has custody of her 12 year old son and 10 year old daughter, both of
whom live with her. Her daughter, who is legally blind, has no income of her own during 2020. Her
son has summer job employment income of $2,350.
Other Information:
1. Ms. Bradmore’s employer provides her with an automobile that has a cost of $47,460, including
applicable HST. During 2020, the automobile is driven 53,000 kilometres, of which 48,000 were
for employment-related activities. Ms. Bradmore pays all of the operating costs for the car. For
2020, these totaled $7,950, with no reimbursement from her employer. The automobile was
used by Ms. Bradmore throughout 2020.
2. Because of the high level of her salary, Ms. Bradmore is required to pay her own advertising
and travel costs. In addition to the operating costs for her vehicle, she paid for the following
employment-related costs:
Meals While Travelling $ 4,500
Hotels 9,000
Advertising 11,000
Entertainment 5,000
Total $29,500

3. Ms. Bradmore received options to acquire 2,500 shares of her employer’s common shares
two years ago. The option price was $50 per share, the market value of the common shares at
the time the options were granted. During July 2020, after the market price of the shares
reaches $72 per share, Ms. Bradmore exercises all of these options. She is still holding the
shares at the end of the year.
4. Her employer provides all employees with gifts on their birthday. For 2020, Ms. Bradmore
received a $250 certificate for a massage and facial at a local spa along with $200 in cash.
5. Ms. Bradmore contributes $5,000 to the Save The Children Fund, a registered Canadian
charity.
6. Ms. Bradmore pays for the following medical expenses during 2020:
For Herself $ 4,800
For Her Son 3,200
For Her Daughter (All Attendant Care) 2,400
Total $10,400
7. In order to improve her ability to deal with people, Ms. Bradmore enrolled in a part time, human
resources program at a local university. Her 2020 tuition totaled $1,890.
Required:
A. Determine Ms. Bradmore’s minimum Net Income For Tax Purposes for the 2020 taxation year.
B. Determine Ms. Bradmore’s minimum Taxable Income for the 2020 taxation year.
C. Determine Ms. Bradmore’s federal Tax Payable for the 2020 taxation year. Ignore any amounts
that might have been withheld by her employer or paid in instalments.

Solution to SSS Problem Four–1

The amount of the personal tax credits would be as follows:
1. Mr. Brown will qualify for the following credits:

Basic Personal Amount $13,229
Spousal ($13,229 - $7,250) 5,979
EI (Maximum) 856
CPP (Maximum) 2,732
Canada Employment 1,245
Total Credit Base $24,041
Rate 15%
Total Credits $ 3,606
2. Ms. Barkin will qualify for the following credits:

Eligible Dependant 13,229
Rate 15%
Note The eligible dependant credit can be taken for any child. It should not be claimed
for the 15 year old as the amount of the credit would be reduced due to his income.
3. Mr. Appleton will qualify for the following credits:

Spousal ($13,229 - $5,650) 7,579
Canada Caregiver - 22 Year Old Son 7,276
Rate 15%
4. Ms. Pale will qualify for the following tax credits:

Spousal ($13,229 - $4,840) 8,389
Age [$7,637 - (15%)($52,500 - $38,508)] 5,538
Pension Income 2,000
Rate 15%
Note that, because her income is below the income threshold, there will be no clawback of
Ms. Pale’s OAS receipts.

5. Mr. Land will qualify for the following tax credits:

Spousal ($13,229 - $1,200) 12,029
Medical Expenses (See Note) 11,706
Rate 15%
Note The claim for medical expenses is determined as follows:

Expenses For Martin, His Spouse, And Under 18
Dependants ($2,450 + 3,240 + $2,620 + $1,450) $ 9,760
Reduced By The Lesser Of:
• [(3%)($126,420)] = $3,793
• 2019 Threshold Amount = $2,397 ( 2,397)
19 Year Old’s Medical Expenses $4,560
• [(3%)($7,240)] = $217
• $2,397 ( 217) 4,343
Total Medical Expense Claim $11,706

Case 1
The solution for this Case would be as follows:
Tax On First $48,535 $ 7,280
Tax On Next $26,465 ($75,000 - $48,535) At 20.5 Percent 5,425
Federal Tax Before Credits $12,705
Basic Personal Amount ($13,229)
EI ( 856)
CPP ( 2,732)
Canada Employment ( 1,245)
Credit Base ($18,062)
Rate 15% ( 2,709)
Charitable Donations
[(15%)($200) + (29%)($4,500 - $200)] ( 1,277)
Federal Tax Payable $ 8,719
Note As none of his income is taxed at 33 percent, this rate is not applicable to the
calculation of the charitable donations tax credit.

Case 2
The solution for this Case is as follows:
Tax On First $48,535 $ 7,280
Spousal ($13,229 - $6,480) ( 6,749)
EI ( 856)
CPP ( 2,732)
Medical Expenses (See Note) ( 7,524)
Rate 15% ( 4,850)
Note The base for the medical expense tax credit would be calculated as follows:
Bob And His Partner $4,300
• [(3%)($75,000)] = $2,250
Son’s Medical Expenses $5,600
• [(3%)($4,200)] = $126
• $2,397 ( 126) 5,474
Case 3
The solution for this Case can be completed as follows:
Tax On First $48,535 $ 7,280

Eligible Dependant Including Infirm Amount
($13,229 + $2,273 - $8,000) ( 7,502)
Transfer Of Son’s Disability ( 8,576)
Rate 15% ( 4,396)
Federal Tax Payable $12,819

Case 4
Tax On First $48,535 $7,280
Tax On Next $2,715 ($51,250 - $48,535) At 20.5 Percent 557
Spousal Including Infirm Amount
($13,229 + $2,273 - $9,600) ( 5,902)
Additional Caregiver Amount (Note) ( 1,374)
Age [$7,637 - (15%)($51,250 - $38,508)] ( 5,726)
Pension ( 2,000)
Spouse’s Age ( 7,637)
Spouse’s Disability ( 8,576)
Spouse’s Pension (= RPP Payments) ( 1,450)
Rate 15% ( 6,884)
Federal Tax Payable $ 953
Note As the income adjusted spousal amount is less than the Canada caregiver amount,
there is an additional amount of $1,374 ($7,276 - $5,902).
The Old Age Security and Canada Pension Plan receipts are not eligible for the pension income
credit; only the Registered Pension Plan income is eligible. As Gabrielle’s income is below the
income threshold, there is no reduction in her age credit.
Case 5
Tax On First $150,473 $31,115
Tax On Next $11,527 ($162,000 - $150,473) At 29 Percent 3,343
Basic Personal Amount (Note 1) ($13,061)
Spousal ($13,061 - $8,400) ( 4,661)
Canada Caregiver - Son ( 7,276)
EI ( 856)
CPP ( 2,732)
Transfer From Son (Note 2) ( 5,000)
Rate 15% ( 5,225)
Note 1 The Basic Personal Amount would be calculated as follows:

$13,229 - [$931][($162,000 - $150,473) ÷ $63,895] = $13,061
Note 2 The transfer from the son is as follows:

Tuition Fees $ 7,900
Maximum Transfer ( 5,000)
Carry Forward (For Son’s Use Only) $ 2,900

The son’s Tax Payable is completely eliminated by his basic personal credit. He can
transfer a maximum of $5,000 of his tuition amount to his father. The remaining $1,900
can be carried forward indefinitely, but must be used by the son.
Case 6
Tax On First $48,535 $ 7,280
Eligible Dependant - Summer ( 13,229)
Canada Caregiver For Child ( 2,273)
Rate 15% ( 4,310)
Note Bob has claimed Summer as his eligible dependant because her income is less
than Martin’s. This means that there is no erosion of the base for the eligible dependant
credit.
Case 7
Tax On First $48,535 $ 7,280
Spousal ($13,229 - $4,600) ( 8,629)
Canada Caregiver - Gabrielle’s Father ( 7,276)
Canada Caregiver - Bob’s Father Nil
EI ( 856)
CPP ( 2,732)
Rate 15% ( 5,095)
Because he is infirm, Gabrielle’s father is eligible for the Canada caregiver credit.
However, as Bob’s father is in good health, he is not eligible for this credit.


Part A
Ms. Bradmore’s minimum Net Income For Tax Purposes would be calculated as follows:
Salary $250,000
Additions:
Commissions 12,000
Bonus (Note 1) 16,000
Life Insurance Premiums (Employer’s Contribution) 460
Automobile Benefit (Note 2) 2,847
Gift (Cash Gifts Create A Taxable Benefit) 200
Stock Option Benefit (Note 3) 55,000
Deductions:
RPP Contributions ( 7,500)
Employment Expenses (Note 4) ( 18,450)
Note 1 Only the $16,000 [(1/2)($32,000)] of the bonus that was received during the year
is included in her income for the current year.
Note 2 The standby charge would be calculated as follows:

[(2%)($47,460)(12)(5,000 ÷ 20,004)] = $2,847
There would be no operating cost benefit as Ms. Bradmore paid for all of the operating costs.
Note 3 The total employment income inclusion would be $55,000 [(2,500)($72 - $50)].
As the option price was equal to the market price at the time the options were issued,
one-half of this amount can be deducted in the determination of Taxable Income (Part B).
Note 4 Potentially deductible expenses are as follows:
Car Operating Costs [(48,000 ÷ 53,000)($7,950)] $ 7,200

Meals [(50%)($4,500)] 2,250
Hotels 9,000
Subtotal for ITA 8(1)(h) and (h.1) $18,450
Advertising 11,000
Entertainment [(50%)($5,000)] 2,500
Total for ITA 8(1)(f) - Limited To Commissions $31,950
All of these costs can be deducted under ITA 8(1)(f). However, the total deduction is
limited to her commission income, which is only $12,000. Alternatively, the car operating
costs, meals, and hotels, can be deducted under ITA 8(1)(h) and (h.1). As shown above,
this total would be $18,450. As Angelina cannot simultaneously use ITA 8(1)(f) and the
combination of ITA 8(1)(h) and (h.1), she will minimize her Net Income For Tax Purposes
by deducting $18,450 under the latter provisions.

Part B
Ms. Bradmore’s minimum Taxable Income would be calculated as follows:

Deductible CPP ($2,898 - $2,732) ( 166)
Net Income For Tax Purposes $310,391
Stock Option Deduction [(1/2)($55,000)] ( 27,500)
Taxable Income $282,891
Part C
Based on the Taxable Income calculated in Part B, Ms. Bradmore’s federal Tax Payable would be
Tax On First $214,368 $49,645
Basic Personal Amount ($13,229 - $931) ($12,298)

Eligible Dependant
($12,298 + $2,273) (Note 5) ( 14,571)
Transfer Of Daughter’s Disability ( 8,576)
Disability Supplement (Note 6) ( 5,003)
EI Premiums ( 856)
CPP Contributions ( 2,732)
Tuition ( 1,890)
Medical Expenses (Note 7) ( 8,003)
Rate 15% ( 8,276)
Charitable Donations (Note 8) ( 2,010)
Note 5 Ms. Bradmore will designate her daughter as her eligible dependant because if
she designated her son, the base for credit would be eroded by his income. As the
daughter is infirm, she is eligible for the extra infirm amount of $2,273. This latter point,
however, is not a factor in choosing her as the eligible dependant. If she had not been
designated as the eligible dependant, the same $2,243 would have been available as the
Canada caregiver for an infirm minor child.
Note 6 Since the attendant care costs claimed as medical expenses are less than the
threshold, there is no reduction in the disability supplement.
Note 7 The base for Ms. Bradmore’s medical expense credit can be calculated as
follows:
Eligible Medical Expenses $10,400
Lesser Of:
• [(3%)($310,557)] = $9,312
Allowable Medical Costs $ 8,003

Note 8 The charitable donations credit for the total donations of $6,200 ($5,000 +
$1,200) would be calculated as follows:
[(15%)(A)] + [(33%)(B)] + [(29%)(C)], where
A = $200
B = The Lesser Of:
• $6,200 - $200 = $6,000
• $282,891 - $214,368 = $68,523 (Note Taxable Income is used here)
C = Nil [$6,200 - ($200 + $6,000)]
The charitable donation credit would be equal to $2,010, calculated as [(15%)($200)]
+ [(33%)($6,000)].

Self Study Problem Five - 2

(CCA And Tax Planning)
For its taxation year ending December 31, 2020, Northcote Inc. has determined that its Net
Income For Tax Purposes, before any deduction for CCA amounts, is equal to $328,000. The
company does not have any Division C deductions, so whatever amount is determined as Net
Income For Tax Purposes will also be the amount of Taxable Income for the taxation year.
On January 1, 2020, the company has the following UCC balances:
Class 1 (Building Acquired In 2005) $2,597,000

Class 8 718,000
Class 10 524,000
During 2020, the cost of additions to Class 10 amounted to $374,000, while the proceeds from
dispositions in this class totaled $234,000. In no case did the proceeds of disposition exceed the
capital cost of the assets retired and there were still assets in Class 10 on December 31, 2020.
There were no acquisitions or dispositions in either Class 1 or Class 8 during 2020.
Required:
A. Calculate the maximum CCA that could be taken by Northcote Ltd. for the taxation year end-
ing December 31, 2020. Your answer should include the maximum that can be deducted for
each CCA class.
B. As Northcote’s tax advisor, indicate how much CCA you would advise the company
to take for the 2020 taxation year, and the specific classes from which it should be
deducted. Provide a brief explanation of the reasons for your recommendation. In provid-
ing this advice, do not take into consideration the possibility that losses can be carried
either forward or back.

(CCA Calculations)
Mr. Marker has been the sole proprietor of Marker Enterprises since its establishment 10 years
ago. This business closes its books on December 31 and, on January 1, 2020, the following
information on its assets was contained in the records of the business:
Undepreciated Original
Type Of Asset Capital Cost Capital Cost CCA Rate
Building (Class 1) $115,000 $190,000 4 Percent
Equipment (Class 8) 96,000 130,000 20 Percent
Vehicles (Class 10) 6,700 30,000 30 Percent
Equipment (Class 53)* 75,000 100,000 50 Percent
*The manufacturing and processing equipment was acquired in 2019.

Other Information:
1. During the year ending December 31, 2020, Mr. Marker’s business acquired additional Class
8 equipment at a total cost of $52,000. This new equipment replaced equipment that had
an original cost of $75,000, which was sold during the year for total proceeds of $35,000.
2. During the year ending December 31, 2020, Mr. Marker acquired a used automobile to be
used in his business for a total cost of $8,000. Also during this year, Mr. Marker sold one of
the trucks that was used in his business for proceeds of $25,000. This truck, which had an
original capital cost of $20,000, had achieved a high value as the result of its extra features,
which were no longer available on later models.
3. As the result of a decision to lease its premises in future years, Mr. Marker sold his build-
ing for total proceeds of $260,000. Of the $260,000 received, $150,000 is for the land on
which the building is situated. The adjusted cost base of the land was equal to the $150,000
proceeds of disposition.
Required: Calculate the total effect of all of the preceding information on Mr. Marker’s Net
Income For Tax Purposes for the year ending December 31, 2020. Your answer should include
the maximum CCA that can be deducted by Mr. Marker for each class. In addition, calculate
the January 1, 2021, UCC balance for each class.

(CCA Calculations Over 4 Years)
NOTE TO STUDENTS We would remind you that prior to 2019, the half year rule
applies to net additions. The AccII provisions only apply in 2019 and subsequent
taxation years.
After several years of hard work at the Shawarma Palace Lebanese restaurant, the Haddad
brothers decide to start Shawarma On Wheels, a business that will have quick delivery of freshly
made Lebanese food. This partnership begins operations on September 1, 2017, and will have a
taxation year that ends on December 31. The brothers plan to take maximum CCA in every year.
On September 12, 2017, the business acquires 20 small cars that will be used for deliveries.
These vehicles have an individual cost of $21,500 each. They run a very successful advertising
campaign using online coupons and social media that is directed at downtown condo owners.
During the 2018 taxation year, six additional cars are acquired at a cost of $22,800 each. These
new vehicles replace six of the original cars, which are sold for proceeds of $11,400 each. Sha-
warma On Wheels accounts for each car sale on an asset by asset basis for tax purposes.
During the 2019 taxation year, 18 additional cars are acquired at a cost of $24,300 each. Also
during this year, the remaining 14 cars from the 2017 purchase are sold. As all the cars had high
mileage, the total proceeds from this sale are $137,200.
In talking to their drivers, the Haddad brothers are repeatedly told that delivering high quality
Lebanese food is a great way to meet attractive young women. As a result, the brothers decide
to start doing some deliveries themselves. In order to try to improve their success in this area,
they acquire two BMW 6 series convertibles at a cost of $135,000 each. These are to be used
exclusively for making deliveries to female callers who are offered a discount if they come down
to the lobby to pick up their orders, thus seeing the impressive cars.
Early in 2020, the authorities discover that, in addition to delivering Lebanese food, the brothers
have also been providing their clients with a variety of illegal substances. In addition to having

to pay hefty fines, they are each sentenced to three years in prison. Given this, Shawarma On
Wheels is closed down on September 30, 2020. The 24 remaining regular delivery cars are sold
for $8,300 each. The two BMW convertibles are sold for $85,000 each.
Required: For each of the taxation years 2017 through 2020, calculate the maximum available
CCA deduction. In addition, determine the amount of any capital gain, recapture, or terminal
loss that arises on any of the transactions that occurred during these years. Ignore GST/HST/
PST considerations.

NOTE TO STUDENTS We would remind you that prior to 2019, the half year rule
taxation years.
All Night Service Ltd. was incorporated on April 1, 2018, to supply computer service 24 hours
per day. At the time of incorporation, the company establishes December 31 as its year end for
both tax and accounting purposes.
On April 1, 2018, the company acquired a new building to be used as an office and communi-
cations centre at a cost of $250,000. This total cost is allocated $180,000 to the building and
$70,000 to the land. As the building is being used 100 percent for non-residential purposes, it is
allocated to a separate Class 1. Also on this date, the company purchased six cars to be used by
the service technicians at a cost of $25,000 per vehicle.
On May 1, 2018, the company purchased a variety of computer repair and maintenance equip-
ment at a cost of $48,000. The company owns no computers as it leases all of its computer
hardware and software.
During 2019, the company trades in three of its old cars on three new minivans. The list price of
the new minivans is $24,000 per vehicle, and the company receives a trade-in allowance toward
this list price of $14,000 per old vehicle.
On September 20, 2020, a convertible is acquired at a cost of $98,000 for use by the president
of the company. In addition, several unusual events occur during 2020. They are as follows:
• Equipment that had a value of $12,000 was stolen by one of the service technicians.
• One of the original six cars was involved in a severe accident, resulting in repair costs
of $8,270. Because the company’s insurance has a deductibility clause, the insurance
proceeds covered only $7,770 of these repair costs.
• Because he had never received a speeding ticket (despite numerous violations) while
driving the car allocated to him, a departing service technician offers the company
$27,000 for one of its original six cars. The company accepts the offer.
Required:
A. Determine the maximum CCA that can be taken in each of the years 2018 through 2020. In
your calculations, include and identify the January 1, 2019, January 1, 2020, and January 1,
2021, UCC balances. Ignore GST/HST/PST considerations.
B. Explain the tax effects of the unusual events that occurred during 2020.


(Purchase And Sale Of Goodwill)
Traxit is a Canadian public company with a taxation year that ends on December 31. It is the
policy of Traxit Ltd. to claim maximum CCA for all classes. On January 1, 2020, Traxit had no
balance in its Class 14.1.
What follows are two independent cases involving payments for goodwill and receipts for good-
will. In each case assume that Traxit has no other transactions during 2020 or 2021 that involve
Class 14.1.
Case One During 2020, Traxit acquires two businesses. With the first acquisition, a
payment is made for goodwill of $56,000. With the second, a payment of $124,000
is made for goodwill. Both businesses are absorbed into the other operations of
Traxit.
During 2021, Traxit sells a portion of its business and, as a consequence, receives a
payment for goodwill of $97,000.
Case Two During 2020, Traxit acquires two businesses. With the first acquisition,
a payment is made for goodwill of $34,000. With the second, a payment of $47,000
is made for goodwill. Both businesses are absorbed into the other operations of
Traxit.
During 2021, Traxit sells a portion of its business and, as a consequence, receives a
payment for goodwill of $85,000.
Required: Determine the tax consequences for the years 2020 and 2021 in each of these two
cases. Your answer should include the January 1, 2022, UCC balance for Class 14.1.

(CCA Calculations)
The following information relates to Bartel Ltd. for its fiscal year that ends on December 31,
2020:
1. The company has UCC balances on January 1, 2020, for its tangible assets as follows:
Class 1 (All Buildings Acquired In 2005) $590,000

Class 8 570,000
Class 10 61,000
2. During 2020, the company purchased office furniture for $14,000.

3. During 2020, the company purchased a truck from its majority shareholder for $22,000. The
truck was four years old, had a fair market value of $22,000, and the shareholder’s UCC for
the truck was $26,000.
4. During 2020, one of the company’s buildings was sold for proceeds of $440,000, of which
$150,000 represented the value of the land on which the building was situated. The building
had a capital cost of $475,000, of which $175,000 represented the value of the land at the
time of the acquisition.

The building was replaced during 2020 with a new building that cost $500,000, of which
$125,000 represented the value of the land. The use of this building is 100 percent office
space and it is allocated to a separate Class 1.
5. Bartel Ltd. has always deducted the maximum CCA in each year of operation.
Required: Calculate the maximum total CCA that can be deducted for 2020. Your answer
should include the maximum that can be deducted for each CCA class.

(CCA Calculations)
The fiscal year of the Atlantic Manufacturing Company, a Canadian public company, ends on
December 31. On January 1, 2020, the UCC balances for the various classes of assets owned
by the company are as follows:
Class 1 - Building (Note 1) $625,000

Class 8 - Office Furniture And Equipment 155,000
Class 10 - Vehicles 118,000
Class 13 - Leasehold Improvements 61,750
Class 14.1 Nil
Class 53 - Manufacturing Equipment 217,000
Note 1 The Class 1 building was acquired, used, in 2008.

During the year ending December 31, 2020, the following acquisitions of assets were made:
Class 8 - Office Furniture And Equipment $ 27,000

Class 10 - Vehicles (Note 2) 33,000
Class 12 - Tools (Note 3) 34,000
Class 13 - Leasehold Improvements 45,000
Class 50 - Computer Hardware 28,000
Note 2 The acquired vehicle was a delivery truck.

Note 3 None of the tools that were acquired during the year cost more than $500.
During this same period, the following dispositions occurred:
Class 8 - Used office furniture and equipment was sold for cash proceeds in the amount
of $35,000. The original cost of these assets was $22,000.
Class 10 - A delivery truck with an original cost of $23,000 was sold for $8,500.
Class 53 - Since the manufacturing operations will be done by subcontractors in the
future, all of the manufacturing equipment was sold for total proceeds of $188,000. Its
original cost was $752,000.
Other Information:
1. The company leases a building for $27,000 per year that houses a portion of its manufactur-
ing operations. The lease was negotiated on January 1, 2017, and has an original term of
eight years. There are two renewal options on the lease. The term for each of these options
is four years. The company made $78,000 of leasehold improvements immediately after
signing the lease. No further improvements were made until the current year.

2. On February 24, 2020, one of the company’s cars was totally destroyed in an accident. At the
time of the accident, the fair market value of the car was $12,300. The proceeds from the
company’s insurance policy amounted to only $8,000. The original cost of the car was $17,000.
3. During March 2020, the company granted a manufacturing licence for one of its products to
a company in southern Ontario. This licensee paid $87,000 for the right to manufacture this
product for an unlimited period of time.
4. It is the policy of the company to deduct maximum CCA in all years.
Required: Calculate the maximum 2020 CCA that can be taken on each class of assets,
the January 1, 2021, UCC balance for each class, and any other 2020 income inclusions or
deductions resulting from the information provided in the problem.

On January 1, 2020, Kars Ltd. has the following UCC balances:
Class 8 $163,000
Class 10 112,000
Class 12 42,000
Class 13 204,000
Class 14.1 132,330
For the taxation year ending December 31, 2020, Kars Ltd. has determined that its Net Income
For Tax Purposes, before any deduction for CCA, amounts to $43,000. As the company does
not have any Division C deductions, Taxable Income, before any deduction for CCA, would also
amount to $43,000.
Other information related to the company’s depreciable assets is as follows:
1. All of the Class 12 assets were acquired in 2019.
2. The leasehold improvements were made in September 2018 at a cost of $240,000.
3. During 2020, the cost of additions to Class 10 amount to $52,000, while the proceeds from
dispositions in this class totaled $29,000. In no case did the proceeds of disposition exceed
the capital cost of the assets retired, and there were still assets in the class as of December
31, 2020.
4. There were no 2020 acquisitions or dispositions in Classes 8, 12, 13, or 14.1.
5. The company has always deducted the maximum amount of CCA.
Required:
A. Calculate the maximum CCA write-off that could be taken by Kars Ltd. for the taxation year
ending December 31, 2020.
B. As Kars’ tax advisor, indicate how much CCA you would advise them to take for the 2020
taxation year and the specific classes from which it should be deducted. Provide a brief
explanation of the reason for your recommendation. In providing this advice, do not take into
consideration the possibility that losses can be carried either back or forward.

SSS Problem Five–2
NOTE TO STUDENTS We would remind you that prior to 2020, the half-year rule
taxation years.

Barbara’s Messenger Service begins operations on November 1, 2017. It operates an intra-city
service that guarantees delivery of important documents within three hours. Barbara Good is the
sole owner of this unincorporated business. The business will have a taxation year that ends on
December 31. Barbara indicates that she plans to take maximum CCA every year.
On November 15, 2017, the business acquires 10 small cars to be used for deliveries. These
vehicles have a cost of $18,000 each.
During the year ending December 31, 2018, the business acquires five additional cars at a cost of
$22,000 each. In addition, four of the original cars are sold for proceeds of $5,000 each.
During the year ending December 31, 2019, eight additional cars are acquired at a cost of $25,000
each. The remaining six cars that were purchased in 2017 are sold for $2,000 each.
Barbara has found that when particularly important, high value packages are involved, some of her
clients require the package to be hand delivered in an awe-inspiring style. These clients are willing
to pay a hefty surcharge for this service. In order to accommodate this, the business acquires two
S Class Mercedes at a cost of $160,000 each.
Early in 2020, Barbara receives a proposal of marriage from her wealthiest client. Barbara accepts
this proposal and, because she will be moving to a different city, she decides to terminate her
business on March 31, 2020. The 13 remaining small cars are sold for $6,000 each. The S Class
Mercedes are sold for $95,000 each.
Required: For each of the taxation years 2017 through 2020, calculate the maximum available
CCA deduction. In addition, determine the amount of any capital gain, recapture, or terminal loss
that arises on any of the transactions that occurred during these years. Ignore GST/HST/PST
considerations.

(CCA Calculations)
The following information relates to Bodlink Manufacturing’s depreciable assets.
1. During 2020, a new factory building was acquired at a cost of $1,656,000. The estimated value
of the land included in the purchase price is $450,000. The building will be used 100 percent
for manufacturing and processing activity. It will be allocated to a separate class.
2. The January 1, 2020, balance in Class 3 was $936,000. During 2020, one of the buildings in
this class burned to the ground. It had a capital cost of $723,000. The insurance proceeds
totaled $972,000.

3. The January 1, 2020, balance in Class 8 was $476,000. During 2020, the company acquired
Class 8 assets at a cost of $163,000. Class 8 assets with a capital cost of $105,000 were sold
for proceeds of $86,000. None of the individual assets sold had proceeds that exceeded their
individual capital cost.
4. The January 1, 2020, balance in Class 10 was $876,000. During 2020, three passenger
vehicles were acquired at a cost of $26,000 each. In addition, a delivery van with a capital cost
of $37,000 was sold for $16,000.
5. The January 1, 2020, balance in Class 10.1 was $25,500. The only asset in this class was the
CEO’s $510,000 Rolls Royce. Because of public relations concerns with such an extravagant
vehicle, the car was sold during 2020 for $385,000.
6. The January 1, 2020, balance in Class 13 was $149,500, reflecting improvements that were
made in 2018, the year in which the lease commenced. These improvements were made on a
property leased as office space for the company’s executives. The basic lease term is for six
years, with an option to renew for a period of two years. Additional improvements, costing
$75,000, were made during 2020.
7. The January 1, 2020, balance in Class 50 was $47,000. During 2020, there were additions to
this class with a capital cost of $23,500.
8. The January 1, 2020, balance in Class 53 was $645,000. During 2020, the company acquired
additional manufacturing and processing equipment at a cost of $232,000.
Bodlink Manufacturing always takes maximum CCA on each class of depreciable assets.
Required: Calculate the maximum CCA that can be taken by Bodlink Manufacturing on each
class of assets for the year ending December 31, 2020, and calculate the UCC for each class of
assets on January 1, 2021. In addition, determine the amount of any capital gain, recapture, or
terminal loss that arises. Ignore GST/HST/PST considerations and the replacement property rules
that are covered in Chapter 8.

Bob’s Buttons is an unincorporated business that began operations on September 1, 2018. The
owner/operator is Bob Pope and his business is selling decorative and promotional buttons to
various clients throughout the city of Toronto and online. Clients include political parties, retail and
online stores, sports teams, and various religious organizations.
When he began operations in 2018, he acquired the following assets:
• A building to house his operations. The total cost of the building was $862,000, including an
estimated $220,000 for the land. The building is used exclusively for his business, with
92 percent of the space being used for manufacturing the buttons. The building is allocated to
a separate Class 1.
• Furniture and fixtures with a cost of $120,000.
• Two customized delivery vehicles at a cost of $36,000 each.
Bob’s business policy is to take maximum CCA. During 2019, the following transaction involving
capital assets take place:

• As the business has enjoyed early success, on April 1, Bob purchases a $110,000 Lexus. He
has large logos of the business painted on both sides of the vehicle. Since Bob inherited a
Jeep, a Ferrari, and a BMW motorcycle, he drives the Lexus 100 percent for business
purposes.
• The business acquires four new delivery vehicles at a cost of $38,000 each. As part of this
purchase, the two vehicles acquired in 2018 are traded in. An allowance of $21,000 is received
for each vehicle.
As Bob believes in free speech and has been told repeatedly by his family that he has a very
twisted sense of humour, some of his favourite buttons have created social media firestorms. After
Bob receives death threats, he decides to terminate his business in 2020 and start a new home
security business in Alberta. By December 31, 2020, all of the assets are sold. The proceeds are
as follows:
Building The building is sold for $903,000, with $220,000 of this value allocated to the
land on which the building is situated.
Furniture And Fixtures These assets are sold for $53,000.
Delivery Vehicles The four delivery vehicles are sold for $34,000 each.
Lexus The Lexus is sold for $62,000.
Required: Determine the maximum CCA that can be taken in each of the years 2018 through
2020. In your calculations, include and identify the UCC balances for January 1, 2019, January 1,
2020, and January 1, 2021.
In addition, indicate any tax effects resulting from the 2019 and 2020 dispositions. Ignore GST/HST
considerations.

(Purchase And Sale Of Goodwill)
Mortex is a Canadian public company with a taxation year that ends on December 31. It is the
policy of Mortex Ltd. to claim maximum CCA for all classes. On January 1, 2020, Mortex had no
balance in its Class 14.1.
The following five independent Cases involve payments for goodwill and receipts for goodwill.
In each case assume that Mortex has no other transactions during 2020 or 2021 that involve
Class 14.1.
Case One During 2020, Mortex acquires two businesses. With the acquisition of
Business 1, a payment of $86,000 is made for goodwill. With the acquisition of
Business 2, a payment of $75,000 is made for goodwill. Both businesses are
absorbed into Mortex’s other operations.
During 2021, Mortex sells a portion of its business and, as a consequence, receives
a payment for goodwill of $90,000.
Case Two Using the same information as in Case One, assume that Mortex
continues to operate both of the 2020 acquisitions as separate businesses and that
the $90,000 receipt for goodwill results from the sale of the first business acquired.
Case Three During 2020, Mortex acquires a business. The cost of this business
includes a payment for goodwill of $96,000. The business is absorbed into Mortex’s
other operations and is not operated separately. Also during 2020, Mortex acquires
an unlimited life franchise at a cost of $113,000.

During 2021, Mortex sells a portion of its business and, as a consequence, receives
a payment for goodwill of $102,000.
Case Four Using the same information as in Case Three, assume that, instead of
selling a portion of its business for an amount that includes goodwill of $102,000, the
unlimited life franchise is sold for $102,000.
Case Five Using the same information as in Case Three, assume that, instead of
selling a portion of its business for an amount that includes goodwill of $102,000, the
unlimited life franchise is sold for $135,000.
Required: Determine the tax consequences for the years 2020 and 2021 in each of these five
Cases. Your answer should include the January 1, 2022, UCC balance for Class 14.1.

For its taxation year ending December 31, 2020, Brownlee Inc. has determined that its Net Income
For Tax Purposes, before any deductions for CCA, amounts to $23,500. The company does not
have any Division C deductions, so whatever amount is determined as Net Income For Tax
Purposes will also be the amount of Taxable Income for the 2020 taxation year.
On January 1, 2020, the company has the following UCC balances:
Class 1 $328,750
Class 8 72,000
Class 10 52,000
During 2020, the cost of additions to Class 10 amounted to $38,000, while the proceeds from
dispositions in this class totaled $23,000. In no case did the proceeds of disposition exceed the
capital cost of the assets retired, and there were still assets in the class as of December 31, 2020.
There were no acquisitions or dispositions in either Class 3 or Class 8 during 2020.
Required:
A. Calculate the maximum CCA that could be taken by Brownlee Company for the taxation year
ending December 31, 2020. Your answer should include the maximum that can be deducted
for each CCA class.
B. As Brownlee’s tax advisor, indicate how much CCA you would advise them to take for the 2020
taxation year and the specific classes from which it should be deducted. Provide a brief
explanation of the reason for your recommendation. In providing this advice, do not take into
consideration the possibility that losses can be carried either back or forward.

Solution to SSS Problem Five–1

2017 Solution
The required calculations are as follows:
Additions To Class 10 [(10 Cars)($18,000)] $180,000

One-Half Net Additions [(1/2)($180,000)] ( 90,000)
CCA Base $ 90,000
CCA [(30%)($90,000)(61/365)] ( 4,512)
One-Half Net Additions 90,000
Class 10 UCC For January 1, 2018 $175,488
As the business was established on November 1, 2017, its operations were carried out for 61 days
in 2017, and only a proportionate share of the annual CCA charge may be taken. We would call
your attention to the fact that it is the length of the taxation year, not the period of ownership of the
assets, that establishes the fraction of the year for which CCA is to be recorded.
2018 Solution
Opening Balance For Class 10 $175,488

Additions [(5 Cars)($22,000)] 110,000
Dispositions - Lesser Of:
• Capital Cost = 4 @ $18,000 = $72,000
• Proceeds Of Disposition = 4 @ $5,000 = $20,000 ( 20,000)
One-Half Net Additions [(1/2)($110,000 - $20,000)] ( 45,000)
CCA Base $220,488
CCA [(30%)($220,488)] ( 66,146)
One-Half Net Additions 45,000
2019 Solution
With respect to Class 10 cars, the required calculations are as follows:

Additions [(8 Cars)($25,000)] 200,000
• Capital Cost = 6 @ $18,000 = $108,000
• Proceeds Of Disposition = 6 @ $2,000 = $12,000 ( 12,000)
AccII Adjustment [(1/2)($200,000 - $12,000)] 94,000
CCA Base $481,342
CCA [(30%)($481,342)] ( 144,403)
AccII Adjustment Reversal ( 94,000)

With respect to the two S Class Mercedes, each would have to be allocated to a separate Class
10.1. Further, the addition to each Class 10.1 would be limited to $30,000. The required
calculations would be as follows:
Mercedes 1 Mercedes 2
Class 10.1 Class 10.1
Acquisitions $30,000 $30,000
AccII Adjustment 15,000 15,000T
CCA Base $45,000 $45,000
CCA [(30%)($45,000)] ( 4,500) ( 4,500)
AccII Adjustment Reversal ( 15,000) ( 16,000)
UCC For January 1, 2020 $16,500 $25,500
2020 Solution
The required calculations for the Class 10 vehicles are as follows:

• Capital Cost [(5)($22,000) + [(8)($25,000)] = $310,000
• Proceeds Of Disposition [(13)($6,000)] = $78,000 ( 78,000)
Ending Balance With No Remaining Assets In Class $164,939
Terminal Loss ( 164,939)
UCC For January 1, 2021 Nil
After all of the assets in Class 10 have been retired there is still a $164,939 balance in the UCC.
This results in a terminal loss that will be deducted in full from the other income of Barbara’s
Messenger Service. The terminal loss will also be deducted from the UCC balance.
With respect to the two Class 10.1 assets, no recapture or terminal losses can be recorded on
these assets. However, in the year of disposal, taxpayers are allowed to deduct one-half year of
CCA. Given the short fiscal final year, this means that on each of the Class 10.1 vehicles there
would be a CCA deduction of $610 [(1/2)(30%)($16,500)(90/365)] for a total of $1,886.

Item 1 - Class 1
The building would be a Class 1 asset. As it is a new building, is going to be used 100 percent for
manufacturing and processing, and it has been put in a separate class, it is eligible for the
enhanced CCA rate of 10 percent. Given this, the required information for this class is as follows:
January 1, 2020, UCC Nil
Additions ($1,656,000 - $450,000) $1,206,000
AccII Adjustment [(50%)($1,206,000)] 603,000
CCA Base $1,809,000
CCA [(10%)($1,809,000)] ( 180,900)
January 1, 2021, UCC $1,025,100

Item 2 - Class 3
The required information for Class 3 is as follows:
January 1, 2020, UCC $936,000
Capital Cost = $723,000
Proceeds Of Disposition = $972,000 ( 723,000)
CCA Base $213,000
CCA [(5%)($213,000)] ( 10,650)
January 1, 2021, UCC $202,350
There would also be a taxable capital gain from the disposition of $124,500 [(1/2)($972,000 -
$723,000)].
Item 3 - Class 8
The required calculations for Class 8 would be as follows:
January 1, 2020, UCC $476,000
Additions $163,000
• Capital Cost = $105,000
• Proceeds Of Disposition = $86,000 ( 86,000) 77,000
AccII Adjustment [(50%)($77,000)] 38,500
CCA Base $591,500
CCA [(20%)($591,500)] ( 118,300)
January 1, 2021, UCC Balance $434,700
Item 4 - Class 10
The required information for Class 10 would be calculated as follows:
January 1, 2020, UCC $876,000
Additions [(3)($26,000)] $78,000
Disposition of Truck - Lesser Of:
• Proceeds Of Disposition = $16,000 ( 16,000) 62,000
CCA Base $969,000
CCA [(30%)($969,000)] ( 290,700)
Item 5 - Class 10.1

In the case of Class 10.1, recapture is not included in income and terminal losses cannot be
deducted. However, in the year of disposition, one-half of the usual CCA can be deducted. This
would be $3,825 [(50%)(30%)($25,500)]. The January 1, 2021, UCC balance would be nil.

Item 6 - Class 13
The 2018 improvements are being written off over eight years, the original term of the lease (six
years), plus the renewal of two years. This means that the CCA rate for these improvements is 12.5
percent. Based on this and applying the first year rules means that, during the years 2018 and
2019, 18.75 percent of the asset’s capital cost was written off, leaving a balance of 81.25 (100.00%
- 18.75%) at the beginning of 2020.
This means that the original capital cost of the improvements was $184,000 ($149,500 ÷ .8125).
Based on this the required calculations would be as follows:
January 1, 2020, UCC $149,500
Additions 75,000
CCA Base $224,500
CCA: ($23,000)
• 2017 ($184,000 ÷ 8)
• 2020 Improvements Including AccII
Adjustment [(150%)($75,000) ÷ 6] ( 18,750) ( 41,750)
Item 7 - Class 50
The required information for Class 50 can be calculated as follows:
January 1, 2020, UCC $47,000
Additions 23,500
CCA Base $82,250
CCA [(55%)($82,250)] ( 45,238)
January 1, 2021, UCC $25,262
Item 8 - Class 53
The required information for Class 53 would be calculated as follows:
January 1, 2020, UCC $ 645,000
Additions 232,000
CCA Base $1,109,000
CCA [(50%)($1,109,000)] ( 554,500)
January 1, 2021, UCC Balance $ 322,500
Taxable Capital Gain

There was a taxable capital gain on the Class 3 building of $124,500.

Summary Of The Results (Not Required)

The maximum CCA for the year ending December 31, 2020, and the January 1, 2021, UCC
balances can be summarized as follows:
Maximum CCA UCC

Class 1 $180,900 $1,025,100
Class 3 10,650 202,350
Class 8 118,300 434,700
Class 10 290,700 647,300
Class 10.1 3,825 Nil
Class 13 41,750 182,750
Class 50 45,238 25,262
Class 53 554,500 322,500

NOTE TO INSTRUCTORS You may wish to advise your students that, until 2020, the
half-year rule was in effect.
CCA For 2018

Class 1 Class 10 Class 8
Opening Balance Nil Nil Nil
Additions
Class 1 ($862,000 - $220,000) $642,000
Class 10 [(2)($36,000)] $72,000
Class 8 $120,000
One-Half Net Additions ( 321,000) ( 36,000) ( 60,000)
CCA Base $321,000 $36,000 $ 60,000
Maximum CCA (Short Fiscal Year)
Class 1 [(10%)($321,000)(122 ÷ 365)]* ( 10,729)
Class 10 [(30%)($36,000)(122 ÷ 365)] ( 3,610)
Class 8 [(20%)($60,000)(122 ÷ 365)] ( 4,011)
One-Half Net Additions 321,000 36,000 60,000
January 1, 2019, UCC $631,271 $68,390 $115,989
*As the Class 1 building is being used more than 90 percent for manufacturing and
processing activity and is allocated to a separate Class 1, it would qualify for the 10
percent CCA rate.
The total maximum CCA for 2018 would be $18,350 ($10,729 + $3,610 + $4,011).

CCA For 2019

No Transactions Class 1 Class 8
Beginning UCC $631,271 $115,989
Maximum CCA:
Class 1 [(10%)($631,271)] ( 63,127)
Class 8 [(20%)($115,989)] ( 23,198)
January 1, 2020, UCC $568,144 $ 92,791
Class 10 Class 10.1

Beginning UCC $ 68,390 Nil
Additions
Class 10 [(4)($38,000)] 152,000
Class 10.1* $30,000
Class 10 Disposition - Lesser Of:
Proceeds = [(2)$21,000)] = $42,000 ( 42,000) Nil
AccII Adjustment 55,000 15,000
CCA Base $233,390 $45,000
Maximum CCA
Class 10 [(30%)($233,390)] ( 70,017)
Class 10.1 [(30%)($45,000)] ( 13,500)
One-Half Net Additions ( 55,000) ( 15,000)
January 1, 2020, UCC $108,373 $16,500
*The CCA base for the Class 10.1 (luxury) car is limited to $30,000.
The total maximum CCA for 2019 would be $169,842 ($63,127 + $23,198 + $70,017 + $13,500).
CCA And Other Tax Consequences For 2020

Class 1 Class 10 Class 8
Beginning UCC $568,144 $141,373 $92,791
Additions Nil Nil Nil
Proceeds Of Disposition - Lesser Of:
$683,000 Vs. $642,000 ( 642,000)
$136,000 Vs. $152,000 ( 136,000)
$53,000 Vs. $120,000 ( 53,000)
Balance With No Remaining Assets ( $73,856) $ 5,373 $39,791
Class 1 Recapture 73,856
Terminal Losses ( 5,373) ( 39,791)
January 1, 2021, UCC Nil Nil Nil
With respect to the Class 10.1 vehicle, the Income Tax Regulations permit taking one-half of the
regular CCA in the year of disposition. Since the final year is not a short fiscal period, this amount
would be $2,475 [(1/2)(30%)($16,500)].
No recapture or terminal loss can be recognized with respect to Class 10.1. However, the balance
would be eliminated, leaving a January 1, 2021, UCC of nil.

The only CCA for 2020 would be the Class 10.1 CCA of $2,475 as Classes 1, 8, and 10 had no
CCA for the year. There would be recapture of $73,856 for Class 1, a terminal loss of $5,373 for
Class 10, and a $39,791 terminal loss for Class 8.
There would also be a taxable capital on the building of $20,500.
The results for 2020 can be summarized as follows:
Class 1 Recapture $ 73,856
Class 10 Terminal Loss ( 5,373)
Class 8 Terminal Loss ( 39,791)
Class 10.1 CCA ( 2,475)
Total Increase In Business Income $26,217
Taxable Capital Gain On Building
[(1/2)($683,000 - $642,000)] 20,500
Total Increase In Net Income For Tax Purposes $46,717

Case One
For the year ending December 31, 2020, the maximum CCA, as well as the UCC balance for
January 1, 2021, for Mortex’s Class 14.1 would be as calculated as follows:
January 1, 2020, Balance Nil

2020 Additions ($86,000 + $75,000) $161,000
CCA Base $241,500
2020 CCA [(5%)($241,500)] ( 12,075)
January 1, 2021, UCC $148,925
The results for 2021, including maximum CCA of $2,946, would be calculated as follows:
January 1, 2021, UCC $148,925
Disposition - Lesser Of:
CCA Base $ 58,925
2021 CCA [(5%)($58,925)] ( 2,946)
January 1, 2022, UCC $ 55,979
There would be no immediate tax consequences resulting from the sale of goodwill, other than a
reduction in the UCC. Note that the capital cost in the calculation is of the single goodwill property.

Case Two
The fact that the two businesses continued operations means that each would have to have a
separate Class 14.1. This would change the 2020 results as follows:
Business 1 Business 2
January 1, 2020, Balance Nil Nil
2020 Additions $ 86,000 $ 75,000
AccII Adjustment
[(50%)($86,000)] 43,000
[(50%)($75,000)] 37,500
CCA Base $129,000 $112,500
2020 CCA
[(5%)($129,000)] ( 6,450)
[(5%)($112,500)] ( 5,625)
January 1, 2021, UCC (Total = $148,925) $ 79,550 $ 69,375
While the total CCA for the year and the total UCC is the same as Case One, it has been recorded
in two separate CCA classes.
With Business 1 having a separate Class 14.1, the results for 2021 would be as follows:
January 1, 2021, UCC - Business 1 $79,550
Proceeds Of Disposition = $90,000
Capital Cost Of Business 1’s Goodwill = $86,000 ( 86,000)
Negative Ending Balance ($ 6,450)
Recapture Of CCA 6,450
January 1, 2022, UCC - Business 1 Nil

2021 CCA [(5%)($69,375)] ( 3,469)
Proceeds Of Disposition $90,000

Capital Cost Of Business 1’s Goodwill ( 86,000)
Capital Gain $ 4,000
Inclusion Rate 1/2
There would be recapture of $6,450, maximum CCA of $3,469, and a taxable capital gain of $2,000
resulting in a net increase in Net Income For Tax Purposes of $4,981 ($6,450 - $3,469 + $2,000).

Case Three
For the year ending December 31, 2020, the maximum CCA, as well as the UCC balance for
January 1, 2021, for Mortex’s Class 14.1 would be as calculated as follows:
January 1, 2020, Balance Nil

2020 Additions ($96,000 + $113,000) $209,000
CCA Base $313,500
2020 CCA [(5%)($313,500)] ( 15,675)
January 1, 2021, UCC $193,325
The results for 2021 would be as follows:

January 1, 2021, UCC $193,325
Capital Cost Of Goodwill = $96,000
CCA Base $ 97,325
2021 CCA [(5%)($97,325)] ( 4,866)
January 1, 2022, UCC $ 92,459

Capital Cost Of Goodwill ( 96,000)
Inclusion Rate 1/2
While Mortex would still have a goodwill account, the capital cost would be nil. There would be
maximum CCA of $4,866 and a taxable capital gain of $3,000 resulting in a net decrease in Net
Income For Tax Purposes of $1,866.
Case Four
The fact that the franchise was sold, rather than the acquired business, will not change the results
for 2020. However, the results of the 2021 disposition would be altered as follows:
January 1, 2021, UCC $193,325
Capital Cost Of Franchise = $113,000
CCA Base $ 91,325
2021 CCA [(5%)($91,325)] ( 4,566)
January 1, 2022, UCC $ 86,759
As there are still assets in the class, no terminal loss on the franchise can be recognized. Maximum
CCA is equal to $4,566. The capital cost of the goodwill would be unchanged at $96,000.
As a reminder, note that a capital loss cannot result from the disposition of a depreciable asset.

Case Five
The results for 2020 are the same as those for Case Three and Four. However, the increase in the
proceeds of disposition would alter the 2021 results as follows:
January 1, 2021, UCC $193,325
Capital Cost Of Franchise = $113,000
CCA Base $ 80,325
2021 CCA [(5%)($80,325)] ( 4,016)
January 1, 2022, UCC $ 76,309

Capital Cost Of Franchise ( 113,000)
Inclusion Rate 1/2
As a positive balance remains in the class at the end of the year, there would be no recapture of
CCA. Once again, the capital cost of the goodwill would be unchanged at $96,000.
There would be maximum CCA of $4,016 and a taxable capital gain of $11,000 resulting in a net
increase in Net Income For Tax Purposes of $6,984.

Part A
The required calculation of the maximum CCA is as follows:
Class 1 Class 8
Opening Balance And CCA Base $328,750 $72,000
CCA Rate 4% 20%
Maximum CCA $ 13,150 $14,400
Class 10
Opening Balance $52,000
Additions $ 38,000
Proceeds Of Disposition ( 23,000) 15,000
CCA Base $74,500
CCA Rate 30%
Maximum CCA $22,350
This gives a maximum amount for CCA of $49,900 for the taxation year ($13,150 + $14,400 +
$22,350).

Part B
Since the company only has Net and Taxable Income before CCA of $23,500 and the problem
states that loss carry overs should not be considered, maximum CCA would not be deducted as
this would produce a loss. Only $23,500 in CCA should be taken in order to reduce the Taxable
Income to nil.
With respect to the classes from which it should be taken, the usual procedure is to deduct the
required amount from the classes with the lowest rates. By leaving the classes with higher rates
untouched, larger amounts of CCA can be deducted in later periods as required.
Taking this approach, the recommended CCA deductions would be as follows:
Class 3 (Maximum Available) $13,150

Class 8 (Required Balance) 10,350
Total CCA $23,500
The deduction of this amount of CCA would serve to reduce Taxable Income to nil.
Note that if there were immediate plans to sell the building for more than its opening UCC, this
could affect the choice of classes to deduct CCA from as any additional CCA taken on Class 1
would have to be added to income as recaptured CCA when the building is sold.

Self Study Problem Six - 2

(Bad Debts)
Dr. Allworth is a dentist with an office in one of the less prosperous sections of Vancouver.
While he has very large gross billings, his patients are such that he often has trouble collecting
the amounts that are due to him. As a consequence, he takes great care in keeping track of
outstanding balances in accounts receivable and in making estimates of the amounts that he
expects will not be collectible.
At the end of 2019, his accounts receivable balance was $104,000 and, for tax purposes, he
deducted a reserve for doubtful debts of $11,500. The corresponding balances at the end of
2020 were $208,000 in total receivables, with a reserve for doubtful debts of $15,900. Both of
the reserves were established on the basis of a detailed aging schedule, applied on a receivable
by receivable basis.
During 2019, there were recoveries of amounts written off as uncollectible in 2018 in the
amount of $190.
During 2020, $8,800 in accounts receivable were written off as uncollectible. However, $700
of this amount related to a patient where there was some hope of collecting the amount due.
As the patient was a personal friend of Dr. Allworth, no real effort had been made to collect the
amount and further dental services had been extended on a credit basis. In addition, accounts
totaling $1,500 that had been written off in 2019 were recovered during 2020.
Required: How would the preceding information affect the calculation of Dr. Allworth’s
business income for 2020?

(Reserves)
Opal Schwartz owns and manages an unincorporated business that offers interior decorating
services to individuals and businesses. This business began operating on January 1, 2020, and
has a taxation year that ends on December 31.
The following information relates to the year ending December 31, 2020:
• Sales of delivered merchandise and services totaled $259,000. As of December 31, $88,000
of this total had not been collected. As several of her clients are having financial difficulties,
she anticipates that $7,000 of these outstanding accounts will not be collectible.
• In addition to sales of delivered merchandise, the business received deposits on orders in
the amount of $27,000. This merchandise is scheduled to be delivered in early 2021.
• Opal purchased a large stock of top quality decorating materials from the trustee of a bank-
rupt decorating business. Since the material is too rococo to appeal to her clientele, she
has found another decorating business that is prepared to buy these materials for $62,000.
Her cost for these materials is $47,000, resulting in an anticipated gross profit of $15,000.
Because of the size of the sale, she has accepted a down payment of $22,000, followed
by two annual instalments of $20,000. The instalments are due on December 31, 2021,
and December 31, 2022.

The following information relates to the year ending December 31, 2021:
• A total of $6,500 of accounts receivable were written off during the year.
• All of the merchandise on which 2020 deposits were received was delivered.
• The $20,000 instalment on the large project was received.
• Sales of delivered merchandise and services totaled $360,000. As of December 31,
$72,000 of this total had not been collected. Opal anticipates that $9,500 of these out-
standing accounts will not be collectible.
• In addition to sales of delivered merchandise, the business received deposits on
orders in the amount of $21,000. This merchandise is scheduled to be delivered in
early 2022.
Required: How would the preceding information affect the calculation of Opal Schwartz’s
business income for the 2020 and 2021 taxation years? Include the full details of your calculations
for each year, not just the net result for each year. Ignore GST/PST implications.

(Work Space In The Home Costs And CCA)
Veronica Hart is employed in retail sales with a large department store. Because of the expertise
in sports clothing that she has gained as an employee, she has decided to start a sports clothing
mail order business in order to supplement her employment income. The business commences
on January 20, 2020.
On that date, she acquires office furniture and display racks at a total cost of $14,000, a computer
for $1,350, and software appropriate to her business activities for $795. She also has a separate
telephone line installed for dealing exclusively with the mail order business.
The business will be run out of her home, making exclusive use of 15 percent of the total available
floor space. The business will have a December 31 year end.
During the period January 20, 2020, through December 31, 2020, her mail order sales total
$89,000. Costs associated with these sales are as follows:
Cost Of Merchandise Sold $46,000

Unsold Merchandise (Lower Of Cost And Market) 23,500
Packaging Materials 1,547
Shipping Costs 3,216
Miscellaneous Office Supplies 825
Telephone Charges (Total For The Period) 210
Printing Of Brochures Distributed 156
Her home was purchased several years ago for $355,000, of which $80,000 was allocated to
the land. Costs accrued with respect to the home for the year ending December 31, 2020, are
as follows:
Utilities For Home (Heat, Electricity, And Water) $2,850

Mortgage Interest Paid 4,183
House Insurance 400
Property Taxes 1,230
Repairs And Maintenance For Home 1,125
Total $9,788

Required:
A. Can Ms. Hart deduct work space in the home costs? Briefly explain your conclusion.
B. Compute the minimum net business income or loss that Ms. Hart must report in her 2020
personal income tax return.
C. Briefly describe any issues that should be discussed with Ms. Hart concerning the work
space in her home costs and business costs.

(Business Income - Employee Vs. Self-Employed)
Ms. Wise is a very successful salesperson. She pays all of her own business expenses and pro-
vides the following information related to her taxation year ending December 31, 2020:
1. Travel costs, largely airline tickets, food, and lodging on trips outside the area in which she
resides, totaled $23,000. Included in this amount is $8,000 of business meals.
2. During the year, she used 40 percent of her personal residence as an office. She has
owned the property for two years. It is her principal place of business and it is used exclu-
sively for meeting clients on a regular basis throughout the year. Interest payments on the
mortgage on this property totaled $13,500 and property taxes for the year were $4,700.
Utilities paid for the house totaled $3,550, and house insurance paid for the year was
$950. Other maintenance costs associated with the property amounted to $1,500. The
January 1, 2020, UCC of the 40 percent portion of the residence that is used for business
is $140,000.
3. For business travel, Ms. Wise drove a car that she purchased for $53,000 on October 15,
2019. During 2020, she drove a total of 50,000 kilometres, 35,000 of these being for busi-
ness purposes. The business usage of her car varies from 60 to 80 percent each year. The
total operating costs for the year were $6,000. In addition, there were financing costs of
$2,500 on a bank loan used to purchase the car. She has always taken maximum CCA on
her car.
4. She paid dues to the Salesperson’s Association (a trade union) of $600.
5. She was billed a total of $12,000 by a local country club. Of this amount, $2,500 was a
payment for membership dues and the remaining $9,500 was for meals and drinks with
clients.
Required:
A. Calculate the maximum amount of expenses that would be deductible by Ms. Wise for 2020
assuming:
ii. She is an employee of a manufacturing company. Her employment income of $137,000
includes $15,000 in commissions.
iii. She represents a group of manufacturers with a diversified product line. During 2020,
she earned total commissions of $137,000.
In making these calculations, ignore GST and PST considerations.
B. Comment on the desirability of taking CCA on Ms. Wise’s personal residence.


(Deductible Automobile Costs And Taxable Benefit)
Bob Neat is the sole shareholder and only employee of Bob’s Bookkeeping Services Ltd., a
Canadian controlled private corporation with a December 31 year end. The company provides
onsite bookkeeping services to a number of clients in the Greater Toronto Area.
As Bob must travel extensively to service clients, the company provides him with a vehicle to
be used in his work. As Bob does not personally own a vehicle, he also uses the vehicle for
personal travel. During 2020, two different vehicles were provided:
Ford Focus During the period January 1, 2020, through April 30, 2020, Bob had use
of a Ford Focus that had been purchased in 2019 for $23,600. As of January 1, 2020,
the Class 10 UCC balance was $12,980. During this period, Bob drove the car a total of
31,000 kilometres, 18,000 of which related to his work for the company. On April 30,
2020, the car was sold for proceeds of $18,200.
Mercedes E-Class Sedan As the business was becoming very profitable, Bob decided
he deserved a better equipped and more comfortable vehicle. On May 1, 2020, the
company acquires a Mercedes E-Class sedan for $52,000. During the period May 1
through December 31, 2020, Bob drives the car a total of 42,000 kilometres, 23,000 of
which involved personal activities.
These were the only vehicles owned by Bob’s Bookkeeping Services during 2020. Bob had one
of these vehicles available to him at all times during 2020.
Throughout 2020, the company paid for all of the operating costs of both vehicles, a total of $17,460.
Required: Determine the following:

A. The tax consequences to Bob’s Bookkeeping Services Ltd. that result from owning and sell-
ing the Ford Focus and owning the Mercedes E-Class sedan during 2020.
B. The minimum amount of the taxable benefit that Bob will have to include in his Net Income
For Tax Purposes for 2020.
Ignore HST considerations in your solution.

(Employer Provided Vs. Employee Owned Vehicle)
Jordan Nash has an employment contract with Emmitt Industries, a Canadian public company.
The contract commences as of January 1, 2020, and covers the three years ending December 31,
2022. His income is well above the floor of the maximum tax bracket and, given this, the combined
federal/provincial tax rate that is effective for any additional income or deductions is 50 percent.
Jordan will require a vehicle for use in his employment duties. Because of the nature of his
work, a luxury vehicle is required, and he and Emmitt have agreed that a $125,000 BMW 750
would be an appropriate choice. Based on this decision, Emmitt has offered Jordan the follow-
ing two alternatives. Emmitt is indifferent as to which alternative he chooses.
Alternative 1 The company will provide the automobile and pay all of the operating
costs, including those related to Jordan’s personal use of the vehicle. The automobile
will be available to Jordan on a full time basis throughout the three year term of his
employment contract. It will be returned to the company at the end of that period.
Alternative 2 The company will provide Jordan with an interest free loan for $125,000
in order to facilitate the purchase of the vehicle. No payments are required on the loan
and it must be repaid in full on December 31, 2022. Jordan will pay all of the operating

costs for the vehicle and, to assist with these costs, the company will provide Jordan
with an allowance of $2,000 per month. Jordan will retain ownership of the vehicle at
the end of his employment contract.
In order to make a decision on these alternatives, Jordan recognizes the need to make esti-
mates of both operating costs and usage of the automobile. The estimates that he will use in
making his decision are as follows:
• He anticipates driving the vehicle 65,000 kilometres each year, with 18,000 of these kilo-
metres being for personal usage.
• If he owns the vehicle, he estimates that his operating costs will average $0.32 per kilo-
metre over the three year term of his employment contract. At the end of the employment
contract, he will sell the vehicle and estimates that the proceeds will be $52,000.
Assume that the prescribed rate for the operating cost benefit is $0.28 per kilometre in all of the
years 2020 through 2022, and that the prescribed interest rate is 2 percent throughout this period.
Required: Advise Jordan as to which of the alternatives he should accept. Base your decision on
the undiscounted cash flows associated with the two alternatives. Ignore GST/HST considerations.

(Valuation Of Business Inventories)
Arnold Fortin owns and operates an unincorporated business that sells hockey jerseys for school
teams. The business has a December 31 year end. During his first year of operations, he has the
following purchases:
Date Quantity Price Total Cost
January 20 2,200 $ 17.00 $ 37,400
March 12 1,800 $18.50 33,300
June 15 6,600 $20.25 133,650
October 8 3,200 $ 21.42 68,544
December 9 1,500 $16.50 24,750
Totals 15,300 $297,644
On December 31, the end of his first year of operation, the inventory on hand amounts to 5,000
units. It is estimated that these units have a replacement cost of $16.75 per unit and a net realiz-
able value of $18.30 per unit.
Required: Calculate the various closing inventory values that could be used to determine busi-
ness income for tax purposes. Your answer should indicate the valuation method being used, as
well as the resulting value.

(Deductible Business Expenses - Corporation)
Astrolab Industries has a taxation year that ends on December 31. For the year ending Decem-
ber 31, 2020, the company’s accounting statements prepared in accordance with generally
accepted accounting principles showed Net Income of $278,000. The accountant has provided
the following other information that was used in the preparation of this Net Income figure:
1. A total of $123,000 was deducted as income tax expense. This amount included $16,000 in
future income taxes.

2. As the company was late in making its required income tax instalments, it was required to
pay interest of $400.
3. For the year ending December 31, 2020, the company recorded $83,000 in amortization
expense. Maximum available CCA deductions for this period were $97,000.
4. The company’s accounting expenses included a payment of dues in a local golf club of
$2,500. The cost of entertaining clients at this club during the year ending December 31,
2020, was $9,600.
5. For accounting purposes, no allowance for bad debts was established at either the begin-
ning or the end of 2020. The $5,200 bad debt expense that was included in the accounting
records reflected only the amounts that were written off during the year. For tax purposes,
the company deducted a reserve of $3,400 for the taxation year ending December 31, 2019.
An appropriate reserve for the year ending December 31, 2020, would be $4,200.
6. The 2020 accounting expenses include $1,500 for the premiums on a life insurance policy
on the life of the company’s president. The company is the beneficiary of this policy. One of
the company’s major creditors requires that this policy be in force during all periods in which
there are loan balances outstanding.
7. The 2020 accounting expenses included $37,000 in bonuses that were declared in favour of
company executives. Only $12,000 of these bonuses were paid in 2020, with the balance
being payable in February, 2021.
8. The bond interest expense that is included in the accounting records includes $3,200 in
discount amortization.
9. On December 31, 2020, the company paid landscaping costs of $27,000. These costs were
treated as capital expenditures for accounting purposes and, as the expenditure was made
at the end of the year, no amortization was recorded in the 2020 financial statements.
Required: For each of the preceding items, indicate the appropriate treatment in the tax
records of Astrolab Industries Ltd. for the year ending December 31, 2020. For those items
that require an adjustment of accounting Net Income in order to arrive at Net Income For Tax
Purposes, indicate the specific adjustment that would be required, including the amount of the
adjustment. The calculation of Net Income For Tax Purposes is not required.

(Proprietorship - Simple Business Income)
Fairway Distribution is a proprietorship. The business distributes a wide variety of health aid
products to retailers. The business is owned by John Fairway. His wife, Jane Fairway, is an avid
golfer with no interest or experience in business matters.
For the taxation year ended December 31, 2020, the accountant calculated a pre-tax Net Income
for Fairway Distribution of $273,000. In calculating this figure, Mr. Fairway’s accountant relied
on generally accepted accounting principles except for the fact that no provision is made at
the end of the year for anticipated bad debts. This variance from generally accepted accounting
principles resulted from the accountant’s belief that Mr. Fairway is a much more reasonable and
pleasant person when he is presented with a higher Net Income figure.
Other Information Other information related to the 2020 taxation year is as follows:
1. In the previous year, a reserve for bad debts was deducted for tax purposes in the amount of
$15,000. For accounting purposes, only the actual 2020 write-offs of $17,500 were deducted.
The accountant felt that an appropriate reserve to be deducted for tax purposes at the end
of 2020 would be $19,200.

2. Accounting income included a deduction for amortization in the amount of $78,500. The
accountant has determined that the maximum CCA for 2020 would be $123,600.
3. The following items were included in the accounting expenses:
Cost of advertising in a foreign newspaper
that is distributed in Canada $ 3,500
Donations to registered charities 1,260
Cost of appraisal on real estate to be sold 1,470
Costs of landscaping work done on the
grounds of Mr. Fairway’s personal estate 5,260
Management fee to Mrs. Jane Fairway 123,000
4. As the business is unincorporated, no taxes were deducted in calculating Net Income.
Required: Calculate the minimum net business income for Fairway Distribution that will be
included in Mr. Fairway’s tax return for the year ending December 31, 2020.

(Business Income With CCA)
Darlington Inc. has a fiscal year ending December 31. For the year ending December 31, 2020,
the company’s accounting Net Income, determined in accordance with generally accepted
accounting principles, was $596,000. Other information related to the preparation of its 2020
tax return is as follows:
1. The income tax expense was $55,000, including $7,000 in future income tax expense.
2. The company spent $95,000 on landscaping for its main office building. This amount was
recorded as an asset in the accounting records and, because the work has an unlimited life,
no amortization was recorded on this asset.
3. The company spent $17,000 on advertisements in Fortune Magazine, a U.S. based publica-
tion. Approximately 90 percent of its non-advertising content is original editorial content.
The advertisements were designed to promote sales in Canadian cities located on the U.S.
border.
4. The amortization expense was $623,000. At the beginning of 2020, the company has a
balance in Class 1 of $1,000,000, representing the UCC of its headquarters buildings. The
company has owned this building since 2001.
In general, other buildings are leased. However, in February 2020, a policy change results in
the acquisition of a new store building at a cost of $650,000, of which $125,000 is allocated
to land. This building is used 100 percent for non-residential purposes and is allocated to a
separate Class 1. None of the usage is for manufacturing and processing.
The January 1, 2020, balance in Class 8 was $4,200,000. During 2020, there were addi-
tions to this class in the total amount of $700,000. In addition, Class 8 assets with a cost
of $400,000 were sold for proceeds of $550,000. The net book value of these assets in the
accounting records was $325,000, and the resulting gain of $225,000 was included in the
accounting income for the year. There are numerous assets remaining in the class at the end
of the 2020 taxation year.
At the beginning of 2020, the UCC in Class 10 was $800,000, reflecting the company’s fleet
of cars. As the company is changing to a policy of leasing its cars, all of these cars were sold
during the year for $687,000. The capital cost of the cars was $1,200,000, and their net book
value in the accounting records was equal to the sale proceeds of $687,000.

5. Included in travel costs deducted in 2020 for accounting purposes was $12,000 for airline
tickets and $41,400 for business meals and entertainment.
6. The company paid, and deducted for accounting purposes, a $2,500 initiation fee for a cor-
porate membership in the Highland Golf And Country Club.
7. The company paid, and deducted, property taxes of $15,000 on vacant land that was being
held for possible future expansion of its headquarters site.
Required: Calculate Darlington Inc.’s minimum Net Income For Tax Purposes for the 2020 taxa-
tion year. In addition, calculate the January 1, 2021, UCC balances for each CCA class.

(Partnership - Business Income, Employee vs. Self-Employed)
The Montpetit Fashion Group is a partnership that custom designs and retails high-fashion cloth-
ing in Calgary. The partnership commenced operations on February 1, 2020.
Part I The three partners have sought your advice on a number of issues related to the tax
procedures to be used by their business. Provide the requested advice on each of the following
issues:
A. Explain to the partners how business income from partnerships is taxed in Canada.
B. The partners have not picked a partnership year end and would like to know what options
they have.
C. Designer gowns, for which there are no production economies of scale, are designed and
made by private seamstresses who work in their own homes. Montpetit supplies the fabric
and accessories and pays a previously agreed fixed amount upon satisfactory completion of
each gown. The partners are uncertain as to the need for source deductions (income tax, EI,
and CPP contributions) on these amounts.
Part II The partners would like you to review the following transactions that occurred dur-
ing their first fiscal year of business ending on December 31, 2020. Advise the partners
on the taxability of income amounts in the calculation of net business income for the year.
Similarly, for expenditures, provide advice on the specific deductions (with amounts) that
can be claimed.
A. Legal fees of $2,400 were paid for drafting a partnership agreement.
B. Five industrial sewing machines were acquired at the beginning of the year at a cost of
$2,500 each. Sewing accessories (thread, needles, scissors, etc.) were also acquired for a
total of $8,500.
C. Each partner contributed $10,000 to get the business off the ground. On July 1, 2020, each
partner loaned the partnership $15,000. Interest of 4 percent per year on the loans was paid
by the partnership for the last six months of the year. In addition to the interest, the partners
are planning to deduct the $10,000 payments on their personal income tax returns for the
current year.
D. At year end, designer clothes with a retail price of $260,000 are held on consignment by
boutiques throughout the city. The cost of making these clothes was $50,000 in labour and
$45,000 in fabric.
E. Montpetit paid $15,000 for the exclusive right to distribute Dali sweaters for five years.

F. During 2020, payments totaling $3,250 were made to the Champs Elysee Club. Of this
amount, $1,100 was for the annual membership fee and the remaining $2,150 was for
charges in the Crepe Suzette Diner. Of the dining charges, $1,500 was spent for entertain-
ing clients and the remainder was for the personal use of the three partners.

(Proprietorship - Business Income With CCA)
Christine Powell is a visual designer. Until May 2020, she worked as an employee for a printing
supply firm. In June, she became self-employed when she started up Design Power. Through
this business, Christine works with several advertising agencies in the design and desktop pub-
lishing of promotional materials.
In January 2020 she comes to you for tax advice. Being vaguely aware of the complexity of the
tax laws, she has kept meticulous track of all business related costs for the period from June 1
to December 31, 2020. Christine’s fiscal year end for the business is December 31.
Christine works out of her home. Her studio occupies 20 percent of the usable space in the
house. Christine does not intend to claim any CCA on the house. The total operating costs
related to the house during the period June 1, 2020, through December 31, 2020, are:
Utilities $1,500
Home Insurance 700
Mortgage Interest 1,600
Total Home Operating Costs $6,400
On June 1, 2020, Christine bought a used car for business and personal use. The total purchase price
of the car was $18,000, financed with a $3,000 cash down payment and a $15,000 term loan. Her
detailed records show that she uses the car 70 percent for business. The automobile costs include:
Down Payment On Car Purchase $3,000
Gasoline And Oil 1,100
Licence And Registration 200
Insurance 800
Interest On Car Loan 700
Total Automobile Costs $5,800
On July 15, 2020, Christine purchased computer equipment for $5,000 and various applications
software for $1,200. On August 1, she purchased several pieces of office furniture for $2,000.
All of these assets were acquired solely for business use.
Her revenues and other costs for the period June 1, 2020, to December 31, 2020, were as follows:
Revenues
Collected $22,000
Billed, but not collected 4,000
Unbilled work-in-progress 1,500
Costs
Legal and business licence fees $1,000
Business meals and entertainment with clients 500
Office and computer supplies 650
Printing subcontract fees 1,800

Required: Calculate the minimum net business income Christine would include in her 2020
personal income tax return. In preparing your solution, ignore GST/HST/PST implications.

(Proprietorship - Business Income With CCA)
Carla Jensen is a Chartered Professional Accountant who is employed as an internal auditor by
a Canadian public company. The constant, unrelenting stress of her employment has resulted in
a dependency on recreational drugs. This, in turn, has resulted in the need for additional funds.
Because of this need for additional income, she operates an unincorporated tax and accounting
services business.
This business has a December 31 year end and has been in operation for several years. The
business operates out of a building that Carla purchased, new, in 2017. She uses this building
exclusively for non-residential purposes. It has been allocated to a separate Class 1.
On January 1, 2020, Carla had unbilled work-in-progress of $29,000 that was billed during 2020.
During 2020, Carla records 800 billable hours at her billing rate of $145 per hour for a total of
$116,000. She bills $81,000 of this amount during 2020 and collects $75,800. On December 31,
2020, her unbilled work-in-progress has increased to $35,000.
On January 1, 2020, the business has the following UCC balances:
Class 1 Building $226,000
Class 8 Furniture And Fixtures 46,500
Class 10 Vehicle (Purchased For $20,300) 17,255
During January 2020, Carla acquires a new computer for $1,800, along with applications soft-
ware for $725.
During March 2020, the Class 10 vehicle is involved in a serious accident, requiring it to be per-
manently taken off the road. The insurance proceeds are $12,300. On April 1, Carla replaces it
with a vehicle with a manufacturer’s list price of $32,000 that is leased for $475 per month. Both
vehicles are used exclusively for business purposes.
During July 2020, Carla replaces some of the furniture in her office. The old furniture has a capi-
tal cost of $18,000, while the new items cost $34,000. Carla receives a trade in allowance for
the old furniture of $6,000.
During September 2020, Carla acquires a client list from an accountant who is retiring. The cost
of this list is $47,000.
During 2020, the various costs of operating her business, determined on an accrual basis, are
as follows:
Building Operating Costs $24,500
Costs Of Operating Leased Vehicle 7,200
Payments To Assistants 13,500
Miscellaneous Office Costs 3,750
Meals With Clients 4,200
Required: Calculate the minimum net business income Carla would include in her 2020 per-
sonal income tax return. In preparing your solution, ignore GST and PST implications.


(ITA 22 Accounts Receivable Election)
Gail Gates is the owner of Gail’s Gates (GG), an unincorporated business that provides whole-
sale distribution of various types of ornamental gates. The business has a December 31 year
end.
Gail is about to marry the man of her dreams and, as he is very, very wealthy (this is what she
dreamed about), she sees no reason to continue operating GG. Given this, she intends to sell
GG to an unrelated party, Ms. Mandy Portals. The transaction will take place on July 1, 2020, and
will involve all of the assets of the business. Ms. Portals does not anticipate incorporating the
business and will continue to use the December 31 year end.
On the date of the sale, the accounts receivable of the business have a face value of $263,000.
Gail and Mandy agree that the current fair market value of these receivables is $249,000. In
2019, Gail deducted a reserve for doubtful debts under ITA 20(1)(l) of $15,000.
Between July 1, 2020, and December 31, 2020, $251,000 of the accounts receivable are col-
lected, with the remaining $12,000 being written off as uncollectible.
Both Gail and Mandy have heard of an election under ITA 22 that may have some influence on
the tax treatment of the transfer of accounts receivable. They would like to have your advice on
this matter. Gail notes that she did not have any capital gains in the previous three years. Further,
she does not expect to have capital gains in 2020 or any subsequent year.
Required:
A. Indicate the tax effects, for both Gail Gates and Mandy Portals, of the disposition of the
accounts receivable and the subsequent 2020 collections and write-offs, assuming:
• that no election is made under ITA 22.
• that they make an election under ITA 22.
B. Indicate, from the point of view of each taxpayer, whether making the election would be a
desirable course of action.

(Comprehensive Case Covering Chapters 1 to 6)
Andrew Bank is 51 years old and lives with his common-law partner, John Bream. John is 49,
qualifies for the disability tax credit, and has 2020 income of $4,500.
They have two adopted children. Their 19 year old son, Bart, is dependent on Andrew because
he is disabled. However, the disability is not sufficient to qualify Bart for the disability tax credit.
Bart has 2020 income of $2,800. Because of his outstanding academic abilities, their 15 year
old son, Carl, is attending university on a full time basis throughout 2020. Andrew has paid his
tuition fees of $17,000. As Carl has no income of his own, he has agreed to transfer the maxi-
mum tuition credit to Andrew.
During 2020, Andrew paid for family medical expenses as follows:
Andrew $ 2,300
John 12,600
Bart 4,600
Carl 400
Total $19,900

Andrew is employed by Martin Inc., a Canadian public company. For 2020, his salary is $123,000.
In addition, he has commissions of $11,500. For the year ending December 31, 2020, his
employer withholds the following amounts from his income.
RPP Contributions* $6,300

EI Premiums 856
Parking Fees At Employer’s Lot 600
*Andrew’s employer makes a matching contribution of $6,300 to his RPP.
Andrew is required to use his own car for employment-related travel, largely going to meet with
clients in their homes. His car was acquired on January 1, 2020, at a cost of $42,000. During
2020, Andrew drove the car a total of 46,000 kilometres, of which 31,000 were employment
related. The remaining 15,000 kilometres involved personal use of the car. His total operating
costs for the year were $9,300. His employer provides him with an allowance of $800 per month
to reimburse him for the employment-related use of his car.
Andrew’s sales territory is large, and during 2020 his employment-related expenses were as
follows:
Hotels $ 8,500
Airline Tickets 4,500
Meals Alone While Travelling 2,000
Meals With Clients And Client Entertainment 8,600
Total $23,600
Andrew’s employer does not reimburse him for any of these costs.
During 2020, Andrew received options to acquire 500 shares of Martin Inc. at a price of $23 per
share. At that time, the shares were trading at $25 per share. Near the end of 2020, Andrew
exercises all of these options. At the time of exercise, the shares are trading at $28 per share.
He is still holding the shares at year end.
Several years ago, Andrew acquired an unincorporated business that he has continued to oper-
ate through the current year. On January 1, 2020, the UCC balances for this business were as
follows:
Class 1 (Building Acquired In 2004) $472,200
Class 8 143,300
Class 50 12,500
Andrew uses tax based accounting for all of his revenues and expenses. He has correctly calcu-
lated his net business income for tax purposes, prior to any CCA amounts, as $189,000.
Required: Calculate Andrew’s 2020 Net Income For Tax Purposes, his 2020 Taxable Income,
and his minimum 2020 federal Tax Payable without consideration of any income tax withheld by
his employer. Ignore GST and PST considerations.

Mr. Martin Bowles is 43 years old and is employed by Dominion Brass, a large public company.
During 2020, his basic salary was $89,000. In addition, he earned $12,000 in commissions. His
employer withheld the following amounts from his income during 2020:


EI Premiums 856
Union Dues 430
Payments For Personal Use Of Company Car 1,200
*Mr. Bowles’ employer makes a matching contribution of $3,750 to his RPP.
His employer provides Mr. Bowles with a car, which is leased at a rate of $459 per month, a
total of $5,508 for the year. During 2020, the car is driven 33,000 kilometres, of which 24,500
are related to his employment activities. The car was used by Mr. Bowles for 11 months during
2020. When he is not using the car, he is required to return it to the company’s garage.
Mr. Bowles is provided with an allowance of $400 per month to cover hotel and meal costs dur-
ing his employment-related travel. Mr. Bowles’ actual costs for 2020 were as follows:
Hotels $2,850
Meals 1,875
It is the policy of Dominion Brass to reimburse tuition paid by employees when taking college
or university courses. During 2020, Mr. Bowles received reimbursements of $1,600 for two
courses. Of this total, $1,000 was for a two day marketing course, while $600 was for a week-
end course in art appreciation.
During 2020, Dominion Brass gave Mr. Bowles a $450 watch in recognition of his 10 years of
service with the company. In addition, all employees were given a $400 gift certificate for pur-
chases at a local department store.
In 2018, Mr. Bowles was granted options to purchase 1,500 shares of Dominion Brass stock at
a price of $52 per share. At that time, the shares were trading at $50 per share. In June 2020,
when the shares are trading at $61 per share, Mr. Bowles exercises the options and immedi-
ately sells the resulting shares at that price.
On January 1, 2020, Mr. Bowles started a management consulting business located in an
office that he rents for $500 per month. In order to run his business effectively, he made
improvements to the office space that cost $12,000. His lease on the office terminates on
December 31, 2022, and does not contain any renewal options.
Other information related to this business is as follows:
Revenues During 2020, Mr. Bowles issued invoices for his services totaling $50,250.
Capital Expenditures Mr. Bowles spent $10,000 for furniture for his new office. In
addition, he purchased a computer for $1,150 and application software for $836.
Costs During 2020, the following costs were incurred in operating the management
consulting business:
Part Time Assistant $5,725
Office Supplies 347
Monthly Telephone Service 312
Cell Phone Charges (For Business Only) 211
Meals With Clients And Client Entertainment 3,150
As the rented office is in the same building complex as his home, Mr. Bowles makes no use of
his employer’s vehicle for operating this business.
Mr. Bowles is married and has two children:
Sally, Martin’s spouse, has 2020 income of $3,450.
Marie is 14 years old and has income of $2,300. All of this income resulted from the
investment of rewards that she has received for science projects.

Ellen is 19 years old and attends university on a full time basis for eight months during
2020. Martin pays her tuition costs of $9,800. As Ellen has no income of her own, she
intends to transfer all of her education related tax credits to Martin.
The family’s 2020 medical expenses, all paid for by Mr. Bowles, are as follows:
Martin $ 2,500
Sally 1,850
Marie 1,600
Ellen 6,540
Total $12,490
During 2020, Mr. Bowles makes donations to registered charities of $1,425, as well as contribu-
tions to registered federal political parties in the amount of $275.
Required: Calculate Mr. Bowles’ 2020 Net Income For Tax Purposes, his 2020 Taxable Income,
and his minimum 2020 federal Tax Payable without consideration of any income tax withheld by
his employer. Ignore GST and PST considerations.

SSS Problem Six–2

SSS Problem Six–1

(Reserves)
Olaf Swensen owns an unincorporated business that delivers specialty food products to indi-
viduals and businesses. In 2020, his first year of operation, he had total delivered sales of
$215,000, of which $85,000 were on account. In addition, he received $14,500 in advances from
customers for products to be delivered in 2021. Olaf does not include advances in his sales figures.
Being unincorporated, he chooses a taxation year that ends on December 31. On December 31,
2020, he had uncollected receivables of $42,000. He estimates that $4,000 of these receivables
will become uncollectible.
In 2021, Olaf's cash sales total $145,000 (not including advances from customers) and account
sales total $92,000. The $14,500 of 2020 orders for which advances were received were all filled in
2021. During 2021, additional advances of $15,300 were received for deliveries in 2022.
During 2021, Olaf needed to write off $4,300 of the December 31, 2020, receivables. On December 31,
2021, the enterprise has uncollected receivables of $38,000. Olaf anticipates that $4,500 of these
receivables will be uncollectible.
The December 31, 2021, receivables contain a single large order for $12,000 of Olaf's products
sold to a very important customer. Because of the size of this order, Olaf has agreed to allow the
customer to defer payment until January 1, 2022. The order was received on September 1, 2021.
Required: How would the preceding information affect the calculation of Olaf Swensen’s
business income for the 2020 and 2021 taxation years? Include the full details of your calcula-
tions, not just the net result for each year.
SSS Problem Six–2

(Valuation Of Business Inventories)
Holden’s Shirts began business on January 1 of the current year. Mike Holden, the owner of the
business, has always had an interest in high end clothing. Based on this interest, his business
involves purchasing shirts from exclusive manufacturers and reselling them at a significant markup.
The business has a December 31 year end.
Purchases of shirts during the current year are as follows:
Date Quantity Price Total Cost
January 27 400 $120 $ 48,000
April 3 1,200 130 156,000
August 15 1,500 125 187,500
October 31 800 128 102,400
Totals 3,900 $493,900
On December 31, the end of the company’s taxation year, the inventory on hand amounts to 950
shirts. It is estimated that these units have a replacement cost of $126 per unit and a net realizable
value of $142 per unit.

SSS Problem Six–3
Required: Calculate the various closing inventory values that could be used to determine
business income for tax purposes. Your answer should indicate the valuation method being used,
as well as the resulting value.
SSS Problem Six–3

(Simple Business Income)
Swindex Inc. has a taxation year ending on December 31. The condensed before tax Income
Statement for Swindex Inc. for the current year, prepared from information included in its financial
statements, is as follows:
Sales $3,000,000
Cost Of Sales ( 1,570,000)
Gross Margin $1,430,000
Other Expenses (Not Including Taxes) ( 755,000)
Operating Income Before Taxes $ 675,000
Other Income And Losses 275,000
Income Before Taxes $ 950,000
Other Information:
1. During the year, the company spent $5,200 for landscaping its head office grounds. For
accounting purposes this was treated as a capital expenditure, but was not amortized during
the current year.
2. The Other Expenses (Not Including Taxes) account included the following amounts:
Bond Discount Amortization $ 500
Interest On Deficient Corporate Tax Instalments 1,700
Reserve For Future Inventory Declines 96,300
Interest Paid On Bonds Issued 22,000
Amortization Expense 36,500
Cost Of Advertising In Magazine Distributed Only In Jamaica 18,000
Charitable Donations 19,100
Cost Of Sponsoring Local Hockey Teams 3,200
Cost Of Advertising Circulars (One-Half Have Been Distributed) 15,000
3. The Other Income And Losses account contains the following items:
Damages Paid For Breach Of Contract $18,000
Loss From Theft 2,800
Cost Of Appraisal Of Property To Be Sold 3,800
4. Maximum CCA has been calculated to be $57,500 for the current year. The policy of the
company is to deduct maximum CCA in each taxation year.
Required: Using the preceding information, calculate Swindex Incorporated’s Net Income For
Tax Purposes for the current year. In addition, provide reasons for any items that were excluded
from your calculations.

SSS Problem Six–4
SSS Problem Six–4

(Corporate Business Income With CCA)
For the taxation year ending December 31, 2020, Voxit Inc. recorded Net Income of $565,000. This
amount was determined by an inexperienced accountant who was promoted when his supervisor
suddenly quit.
Other Information:
1. The following items were deducted (added) during the year:
Current Income Tax Expense $210,000
Future Income Tax Benefit ( 23,000)
Interest Expense
(Includes $3,500 In Discount Amortization) 22,000
Interest On Deficient Corporate Tax Instalments 1,250
Reserve For Future Inventory Declines 12,600
Charitable Donations 14,500
Cost Of Sponsoring Local Soccer Team 4,600
Loss From Employee Theft 5,200
Loss On The Sale Of Vehicles 36,200
Cost Of Appraisal Of Building To Be Sold 2,600
2. On January 1, 2020, the company has the following UCC balances:

Class 1 (All Assets Acquired in 2005) $325,236
Class 8 226,964
Class 10 87,468
Class 13 29,322
During the year ending December 31, 2020, the company acquired furniture and fixtures at a
cost of $262,000. Furniture and fixtures with a cost of $275,000 and a fair market value of
$189,000 were traded in on the new assets.
The balance in Class 10 reflects the company’s fleet of delivery vehicles. In the accounting
records, their net book value was $92,700. During the year ending December 31, 2020, all of
these vehicles were sold and replaced with leased vehicles. The sale proceeds amounted to
$56,500, with the amount received for each vehicle being less than its cost.
The Class 13 assets relate to a lease that was signed on January 1, 2016. At that time, the cost
of the improvements on the leased property was $36,400. The basic term of the lease is
10 years and there are two 4 year renewal options.
Prior to 2020, all the computer equipment was leased. During 2020, computer equipment and
systems software was purchased for $20,000.
3. On December 31, 2020, the company acquired an unincorporated business. The purchase
price included a $55,000 payment for goodwill. As the acquisition was late in the year, none of
the acquired assets were amortized for accounting purposes.
Required: Calculate Voxit Inc.’s minimum Net Income For Tax Purposes for the year ending
December 31, 2020.

SSS Problem Six–6
SSS Problem Six–5

(ITA 22 Accounts Receivable Election)
Brownstone Enterprises is an unincorporated business that has operating successfully for a
number of years under the direction of its owner, Samuel Brownstone. However, after receiving a
large inheritance from his deceased father, he is in a position to sell the business and retire. All of
the assets of the business will be sold to Ms. Heidi Pilsner, an unrelated party. Ms. Pilsner will
continue to operate the business, using the same December 31 year end. At this time, she has no
plans to incorporate the business.
The assets change hands on July 2, 2020. With respect to the accounts receivable that are on the
books at that date, the following information is available:
Face Value $463,000
Realizable Value $427,000
Reserve Deducted In 2019 Taxation Year $ 31,000
Between July 2, 2020, and December 31, 2020, $433,000 of the accounts receivable are collected,
with the remaining $30,000 being written off as uncollectible.
Both Mr. Brownstone and Ms. Pilsner have heard of an election under ITA 22 that may have some
influence on the tax treatment of the transfer of accounts receivable. They would like to have your
advice on this matter. They will both have significant capital gains in 2020.
Required:
A. Indicate the tax effects, for both Mr. Brownstone and Ms. Pilsner, of the disposition of the
accounts receivable and the subsequent 2020 collections and write-offs, assuming:
• that no election is made under ITA 22.
• that they make an election under ITA 22.
B. Indicate, from the point of view of each taxpayer, whether making the election would be a
desirable course of action.
SSS Problem Six–6

Mr. Allen Archer is employed by Global Inc., a Canadian public company. For 2020, his salary is
$56,000. In addition, his commissions for the year total $48,000. For the year ending December 31,
2020, his employer withholds the following amounts from his income.
EI Premiums 856
Parking Fees At Employer’s Lot 600
*Mr. Archer’s employer makes a matching contribution of $4,200 to his RPP.
Mr. Archer’s employer requires him to use his own car for traveling to clients. The car that
Mr. Archer is currently using was acquired on January 1, 2020, at a cost of $28,500. During 2020,
Mr. Archer drove the car a total of 21,000 kilometres, of which 18,500 were employment related.
The other 2,500 kilometres involved personal use. His total operating costs for the year were
$3,750. Global Inc. provided an allowance of $500 per month to reimburse him for the use of the
car.
His employment-related travel did not require overnight stays and, as a consequence, he has no
hotel expenses. However, he spent $7,200 during 2020 on meals and entertainment for clients.
These amounts were fully reimbursed by his employer.

SSS Problem Six–6
Mr. Archer’s employer granted him options to acquire 1,000 shares of the Global Inc. stock for $12
per share a year ago. At the time the options were granted, the Global Inc. shares were trading at
$10 per share. During 2020, Mr. Archer exercises the options. At the time of exercise, the Global
Inc. shares were trading at $18.25 per share. He is still holding the shares at the end of the year.
Mr. Archer has a spouse and two children. During 2020, his spouse, Jan, had Net Income For Tax
Purposes of $7,500. His 22 year old son, Ron, is dependent on Mr. Archer because he is disabled.
However, the disability is not severe enough to create a marked restriction in his daily activities.
Ron has no income during 2020. His 18 year old daughter, Mona, was in full time attendance at a
Canadian university for eight months during 2020. While she has 2020 Net Income For Tax
Purposes of $4,750, Mr. Archer paid her tuition fees of $9,200. Mona has agreed to transfer her
tuition tax credit to Mr. Archer.
During 2020, Mr. Archer paid medical expenses as follows:
Allen $ 3,780
Jan 2,000
Ron 6,400
Mona 1,500
Total $13,680
Because of his interest in antiques, Mr. Archer opened a retail operation to sell antiques on January 1,
2020. Mr. Archer invests $239,000 of his savings in this unincorporated business. Of this amount
$183,000 was used to purchase a new store building, with the remaining $56,000 invested in
fixtures for the store. He estimates that $42,000 of the $183,000 paid for the store represents the
value of the land. The business is called Allen’s Oldies and, as the retail operation is only a few
blocks from his residence, Mr. Archer makes no use of his car in this business.
As Mr. Archer has had no formal training as an accountant, he keeps the records for Allen’s Oldies
on a cash basis. As at December 31, 2020, the business had accumulated total cash of $32,800.
Mr. Archer’s informal records indicate that at December 31, 2020, the business had receivables
from customers of $2,600, inventories with a cost of $12,600, and liabilities to suppliers of $5,750.
The business had no other debt obligations on this date.
Required: Calculate Mr. Archer’s 2020 Net Income For Tax Purposes, his 2020 Taxable Income,
and his minimum 2020 federal Tax Payable without consideration of any income tax withheld by his
employer. Ignore GST and PST considerations.

Solution to SSS Problem Six–2

The results for the two years would be as follows:
2020 2021
Cash Sales ($215,000 - $85,000) $130,000
Cash Sales (Given) $145,000
Sales On Account 85,000 92,000
Advances From Customers 14,500 15,300

Reserve For Undelivered Merchandise:
Add Prior Year Reserve Nil 14,500
Deduct Current Year Reserve ( 14,500) ( 15,300)
Reserve For Doubtful Debts:

Add Prior Year Reserve Nil 4,000
Deduct Current Year Reserve ( 4,000) ( 4,500)
Deduct Actual Write-Offs Nil ( 4,300)
Reserve For Unpaid Amounts (See Note) N/A Nil

Net Effect $211,000 $246,700
Note: In order to deduct a reserve for unpaid amounts on sales that are not of land, some
part of the proceeds must be due more than two years after the date of the related sale. In this
case, the proceeds are due four months after the sale and, as a consequence, no reserve for
unpaid amounts can be deducted.

Valuation Basis
For tax purposes, the company can use either fair market value or lower of cost and market. The
inventory rules under GAAP are more restrictive as inventories must be measured using the lower
of cost and net realizable value.
Market Determination - Two Possible Values

For tax purposes, the company can measure market value using either replacement cost or net
realizable value. These values would be as follows:
Replacement Cost [($126)(950)] $119,700
Net Realizable Value [($142)(950)] $134,900
While it is not an acceptable practice under GAAP, the CRA will accept the use of market values,
without regard to their relationship to cost.

Cost Determination
In the determination of cost, taxpayers are permitted to use specific identification (this would not
appear to be practical here), a First In, First Out (FIFO) assumption, or average cost.
Using the First In, First Out method, the appropriate value for the ending inventory would be
determined as follows:
800 Units At $128 $102,400

150 Units At $125 18,750
950 Units At FIFO Cost $121,150
Based on average cost, the ending inventory value would be calculated as follows:
Number Of Units 950

Average Cost [($493,900 ÷ 3,900)] 126.64
950 Units At Average Cost $120,308
Lower Of Cost And Market - Four Possible Values

For tax purposes, the possible values here would be as follows:
Lower Of Replacement Cost And FIFO Cost $119,700

Lower Of Replacement Cost And Average Cost 119,700
Lower Of Net Realizable Value And FIFO Cost 121,150
Lower Of Net Realizable Value And Average Cost 120,308
For accounting purposes, only the last two values would be acceptable.

The Net Income For Tax Purposes of Swindex Inc. for the year would be calculated as follows:
Accounting Income Before Taxes $ 950,000

Additions:
Bond Discount Amortization $ 500
Interest On Tax Instalments 1,700
Reserve For Future Inventory Declines
(Note 1) 96,300
Charitable Donations (Note 2) 19,100
Prepaid Advertising [(1/2)($15,000)] 7,500
Appraisal Fees (Note 3) 3,800 165,400
$1,115,400
Deduction:
Landscaping Costs ( 5,200)
CCA ( 57,500)
Net Income For Tax Purposes $1,052,700
Note 1 Only those reserves that are specified in the Income Tax Act can be deducted for
tax purposes. Reserve for inventory declines is not listed.

Note 2 The corporate charitable donations can be deducted in the calculation of Taxable
Income, but are not deductible in the calculation of Net Income For Tax Purposes.
Note 3 While the problem states that this item was deducted in the calculation of
accounting income, this would not be in compliance with generally accepted accounting
principles. Generally accepted accounting principles would require that the appraisal costs
on the property to be sold be added to the cost of the relevant property. Regardless of the
treatment accorded to this item in the accounting records of Swindex, it is clear that it could
not be deducted for tax purposes. These costs will be added to the adjusted cost base of
the property and serve to reduce any gain (increase any loss) resulting from the sale of the
property.
Other Items Further explanation related to the items not included in the preceding calculation of
Net Income For Tax Purposes is as follows:
Bond Interest The interest would be deductible as the bonds are a liability of the
business.
Foreign Advertising Advertising in foreign periodicals is fully deductible provided the

advertising is not directed at Canadians. Since the periodical is not distributed in Canada,
these expenses would be deductible.
Hockey Sponsorship This would be deductible as a promotional expense.
Damages As the damages relate to a transaction that produces business income, they
are considered a business expense.
Loss From Theft Losses of this type, unless they result from the activity of senior
officers, are considered to be deductible as a normal cost of doing business.

The Net Income For Tax Purposes of Voxit Inc., would be calculated as follows:
Accounting Income $565,000
Additions:
Current Income Tax Expense $210,000
Bond Discount Amortization 3,500
Interest On Tax Instalments 1,250
Reserve For Future Inventory
Declines (Note 1) 12,600
Charitable Donations (Note 2) 14,500
Loss On The Sale Of Vehicles
($92,700 - $56,500) 36,200
Appraisal Fees (Note 3) 2,600 332,150
Subtotal $897,150
Deductions:
Future Income Tax Benefit ($ 23,000)
CCA (Note 4) ( 103,683)
Terminal Loss On Class 10 ( 30,968) ( 157,651)

Note 1 Reserves are used in accounting statements to reflect anticipated future events.
Such amounts are not deductible for tax purposes.
Note 2 The corporate charitable donations can be deducted in the calculation of Taxable
Income, but are not deductible in the calculation of Net Income For Tax Purposes.
Note 3 Generally accepted accounting principles would require that the appraisal costs
on the property to be sold be added to the cost of the relevant property. Regardless of the
treatment accorded to this item in the accounting records of Voxit, it is clear that it could not
be deducted for tax purposes and would be added to Class 1.
Note 4 The required CCA calculations would be as follows:

Class 1
Class 1 Opening Balance $325,236
Additions - Appraisal Cost 2,600
CCA Base $329,136
Rate 4%
Class 1 CCA $ 13,165
Class 8
Additions $262,000
Disposal - Lesser Of:
• Proceeds = $189,000
• Cost = $275,000 ( 189,000) 73,000
CCA Base $336,464
Rate 20%
Class 8 CCA $ 67,293
Class 10
Dispositions - Lesser Of
• Capital Cost (Not Given)
• Proceeds = $56,500 ( 56,500)
Ending Balance With No Remaining Assets = Terminal Loss $30,968
The cost of each individual vehicle was not provided in the problem. However, the
problem did state that no vehicle had proceeds of disposition that was greater than its
cost. Given this, the capital cost is not required.
Class 14.1
The CCA calculation for this class would be as follows:
Class 14.1 UCC Opening Balance Nil
Acquisition Of Goodwill $55,000
CCA Base $82,500
Rate 5%
Class 14.1 CCA $ 4,125

Total CCA
The total CCA deductible would be as follows:

Class 1 (Preceding Calculation) $ 13,165
Class 8 (Preceding Calculation) 67,293
Class 10 (Terminal Loss) Nil
Class 13 ($36,400 ÷ 14) 2,600
Class 14.1 (Preceding Calculation) 4,125
Class 50 [(150%)(55%)($20,000)] 16,500
Total CCA $103,683
Note that the January 1 Class 13 balance shows that less than the maximum CCA for this
class has been claimed in the past.
Notes On Excluded Items

• The cost of sponsoring the local soccer team is deductible for both tax and accounting
purposes.
• The cost of theft by employees who are not officers of the company is deductible.

Part A - No Election
If the ITA 22 election is not made, the tax consequences for Mr. Brownstone would be as follows:
Add: 2019 Reserve For Doubtful Debts $31,000
Deduct Capital Loss:
Adjusted Cost Base ( 463,000)
Capital Loss ($ 36,000)
Non-Deductible One-Half 18,000 ( 18,000)
2020 Income Inclusion $13,000
Note that the $18,000 allowable capital loss can only be deducted to the extent of Mr. Brown-
stone’s taxable capital gains. In the absence of such capital gains, the income inclusion would have
been $31,000.
If the ITA 22 election is not made, the tax consequences to Ms. Pilsner would be as follows:
Proceeds Of Disposition (Amount Collected) $433,000
Non-Taxable One-Half ( 3,000)
2020 Income Inclusion $ 3,000
Part A - Election
If the ITA 22 election is made, the tax consequences for Mr. Brownstone would be as follows:
Add: 2019 Reserve For Doubtful Debts $31,000
Deduct: Business Loss ($463,000 - $427,000) ( 36,000)
2020 Deduction From Income ($ 5,000)

If the ITA 22 election is made, the tax consequences to Ms. Pilsner would be as follows:
Add: Face Value - Price Paid ($463,000 - $427,000) $36,000
Deduct: Actual Write-Offs ($463,000 - $433,000) ( 30,000)
2020 Income Inclusion $ 6,000
Part B
For Mr. Brownstone, the ITA 22 election is clearly desirable, converting a $13,000 income inclusion
into a $5,000 deduction.
For Ms. Pilsner, the fact that actual collections ($433,000) exceed the estimated value of the
accounts receivable on the date of the sale ($427,000), means that the ITA 22 election would not
be desirable. It would double her income inclusion from $3,000 to $6,000.

Net Employment Income
The required calculations here are as follows:
Salary $56,000
Additions
Commissions 48,000
Car Allowance [($500)(12)] 6,000
Stock Option Benefit [($18.25 - $12.00)(1,000)] 6,250
Deductions
RPP Contributions ( 4,200)
Car Operating Costs [($3,750)(18,500 ÷ 21,000)] ( 3,304)
Car CCA [($28,500)(30%)(150%)(18,500 ÷ 21,000)] ( 11,298)
Since the meals and entertainment expenses were fully reimbursed by his employer, they
have no effect on Mr. Archer’s employment income. As it is not deductible for tax
purposes, the amount withheld for parking has no effect on Mr. Archer’s employment
income.
Net Business Income

Cash Basis Income (Given) $32,800
December 31 Receivables 2,600
December 31 Inventories 12,600
December 31 Payables ( 5,750)
CCA On Building [($183,000 - $42,000)(6%)(150%)]* ( 12,690)
CCA On Furniture And Fixtures [($56,000)(20%)(150%)] ( 16,800)
Net Business Income $12,760
*It would appear that the new building will be used exclusively for non-residential
purposes. Given this it will be eligible for the 6 percent CCA rate, provided that it is kept in
a separate Class 1.

Net Income For Tax Purposes

The required calculation here is as follows:
Net Employment Income $ 97,448
Net Business Income 12,760
Deductible CPP ($2,898 - $2,732) ( 166)
Taxable Income
The required calculation is as follows:
Stock Option Deduction [($6,250)(1/2)] ( 3,125)
Tax Payable
Tax On First $97,069 $17,230
Tax Before Credits $19,790
Tax Credits:
Basic Personal Amount (Mr. Archer) ($13,229)
Spouse ($13,229 - $7,500) ( 5,729)
Canada Caregiver - Ron ( 7,276)
EI Premiums ( 856)
CPP Contributions ( 2,732)
Transfer Of Tuition - Lesser Of:
• Absolute Limit Of $5,000
• Actual Tuition Of $9,200 ( 5,000)
Medical Expenses (Note) ( 11,140)
Total Credit Base ($47,207)
Rate 15% ( 7,081)
Note The medical expense credit base would be calculated as follows:

Medical Expenses For Allen And Jan
($3,780 + $2,000) $ 5,780
• [(3%)($110,042)] = $3,301
Balance Before Dependants 18 And Over $ 3,383
Ron’s Medical Expenses $6,400
• $2,397
• [(3%)(Nil)] = Nil Nil 6,400

Mona’s Medical Expenses $1,500

• $2,397
• [(3%)($4,750)] = $143 ( 143) 1,357
Total Medical Expense Claim $ 11,140

Self Study Problem Seven - 2

(Interest Deductibility - 4 Cases)
Each of the following independent Cases involves the payment of interest and the issue of
whether the interest will be deductible for tax purposes.
Case A John Artho owns 1,000 shares of Bee Ltd., a publicly traded company. He also owns
a personal use condominium that was financed with borrowed money. Mr. Artho sells the
1,000 shares of Bee Ltd. and uses the proceeds to pay down the mortgage on the condo-
minium. He subsequently borrows money to acquire another 1,000 shares of Bee Ltd. Would
the interest on the new loan be deductible? Explain your conclusion.
Case B Meridee Burns borrows $225,000 and acquires an income producing property for
$225,000. She subsequently sells the property for $275,000 and, without repaying the funds
borrowed to acquire the first property, uses the proceeds to acquire two other properties. The
cost of property A is $50,000, while the cost of property B is $225,000. How will the $225,000
in borrowing be linked to the two new properties?
Case C Meridee Burns borrows $225,000 and acquires an income producing property for
$225,000. She subsequently sells the property for $190,000 and, without repaying the funds
borrowed to acquire the first property, uses the proceeds to acquire two other properties. The
cost of property A is $60,000, while the cost of property B is $130,000. How will the $225,000
in borrowing be linked to the two new properties?
Case D Jason Bridges borrows $320,000 and invests the entire amount in the shares of Loser
Inc. Six months later, he sells these shares for $175,000. The proceeds of the sale are used to
pay off $175,000 of the loan, leaving an ongoing balance of $145,000. Can he continue to deduct
the interest payments on this $145,000 balance? Explain your conclusion.

(Rental Income)
In March 2019, Andrew Thorne acquired a four unit apartment building at a cost of $875,000.
Of this total, it is estimated that the land on which the building is situated is worth $185,000.
The units in the apartment are similar in size, and for purposes of allocation to a CCA class, the
property is considered to be a single asset.
Two of the units will be rented on a furnished basis. To this end, Andrew has acquired furniture
at a cost of $43,000.
During April 2019, all of the units were rented for the remainder of the year. For this year, the
units generated rents of $81,000 and expenses, other than CCA, of $23,400 were incurred.
In July 2020, the tenants in both of the furnished units terminate their leases and move out.
Because he is unable to find tenants who are interested in furnished units, the two units remain
empty for three months. Given this situation, Andrew sells all of the furniture for $31,000.
During 2020, the units generate rents of $54,500. Expenses for the year, other than CCA, total
$29,400.
Andrew deducts the maximum CCA allowable in both 2019 and 2020.

Required: Calculate the Net Rental Income for each of the two years 2019 and 2020. Also,
determine his UCC balances on January 1, 2021. Include in your solution any tax consequences
associated with the sale of the furniture.

(Dividend vs. Interest Income)
Sarah, Sally, and Suzanne Baxter are three sisters who live in the same province. Because of their
alternative career choices, they have enjoyed varying degrees of economic success.
Sarah Sarah has devoted her life to the arts. However, the scarcity of work in her
field has resulted in her being in the 15 percent federal tax bracket and the 5 percent
provincial bracket.
Sally Sally has always worked in retail and is doing well as a store manager. She is in
the 26 percent federal tax bracket and the 11 percent provincial tax bracket.
Suzanne Suzanne is a very successful attorney. Her income places her in the
33 percent federal tax bracket and the 16 percent provincial tax bracket.
The provincial dividend tax credit on eligible dividends is equal to 27 percent of the dividend
gross up.
On January 1 of the current year, as the result of an inheritance from a distant uncle, each of the
sisters has $15,000 to invest. They are looking at the following alternatives:
Corporate Bonds The issue that they are considering has a 4.5 percent coupon rate,
is selling at par, and matures in 25 years.
Preferred Stock The shares that they are considering have a dividend yield of
5.6 percent. The eligible dividend is cumulative but not participating.
The income from these investments would not move any of the three sisters to a higher fed-
eral or provincial tax bracket. Each sister has sufficient income to use all of her available tax
credits.
Required: Advise each of the Baxter sisters as to which investment they should make. As part
of your recommendation, calculate the after tax income that would be generated for each of the
sisters, assuming that they invested their $15,000 in:
A. The corporate bonds.
B. The preferred stock.

(Property Income - Alternative Investments)
On January 1, 2020, Ms. Joan Bagley has $650,000 in a bank account. While the account has
great flexibility in terms of deposits and withdrawals, it pays interest at an annual rate of only
1 percent. She would like to retain $50,000 of this balance as a contingency fund, while invest-
ing the $600,000 balance for a year. After consulting with her financial advisor, she is considering
the following investment alternatives:
• A $600,000 guaranteed investment certificate that will mature on December 31, 2020. The
certificate will pay annual interest at a rate of 4.5 percent on December 31.

• Preferred shares of a Canadian public company with a stated value of $600,000. These
shares pay an annual eligible dividend of 5.25 percent on December 15. Ms. Bagley antici-
pates selling these shares on December 31, 2020, for their stated value.
• Shares of a public high tech company at a cost of $600,000. While these shares do not
pay dividends, Ms. Bagley anticipates selling these shares on December 31, 2020, for
$675,000.
Ms. Bagley has sufficient employment income that she is in the 29 percent federal tax bracket
and the 12 percent provincial tax bracket. The provincial dividend tax credit on eligible dividends is
equal to 28 percent of the gross up.
Assume the preferred and common shares can be sold at the anticipated values on December 31,
2020.
Required: For each investment alternative, determine the after tax return that Ms. Bagley will
earn during the year ending December 31, 2020.

(Property Income - Alternative Investments)
During December 2019, Ms. Holmes reaches a settlement with her former husband that requires
him to make a lump sum payment to her of $100,000 on January 1, 2020. While Ms. Holmes has
no immediate need for the funds, she will require them on January 1, 2021 in order to finance a
new business venture that she plans to launch. As a consequence, she would like to invest the
funds for the year ending December 31, 2020. She is considering the following alternatives:
• Investment of the full $100,000 in a one year, guaranteed investment certificate that pays
annual interest of 5.5 percent.
• Investment of the full $100,000 in the shares of Norton Ltd., a publicly traded Canadian
company. Ms. Holmes expects that the company will pay eligible dividends on these
shares during 2020 of $5,000. She anticipates that by the end of 2020, the shares will be
worth at least $106,000.
• Investment of the full $100,000 in a rental property with a cost of $165,000. The property
currently has a tenant whose lease calls for rental payments during 2020 of $13,200. Cash
expenses for the year (interest, taxes, and condominium fees) are expected to be $9,600.
Of the total cost of $165,000, an amount of $15,000 can be allocated to the land on which
the building is situated. Ms. Holmes believes that the property can be sold on December
31, 2020, to net her $175,000.
Ms. Holmes expects to have employment income in excess of $250,000 during 2020. Her pro-
vincial tax rate on any additional income is 18 percent, while the provincial dividend tax credit on
eligible dividends is equal to 27 percent of the gross up.
Required: Write a brief memorandum providing investment advice to Ms. Holmes on the
three alternatives.

(Business Income And Income Trusts)
Ms. Sarah Smursch is an accountant who specializes in preparing financial statements for small
businesses. She has a well established practice in London, Ontario.

Relevant information on her practice for the taxation year ending December 31, 2020, is as follows:
December 31, 2019 Unbilled Work-In-Progress $ 23,000
Billable Hours (1,725 Hours At $200) 345,000
December 31, 2020 Unbilled Work-In-Progress 14,000
Office Supplies And Office Expenses 23,000
Rent 60,000
Business Meals And Entertainment 18,000
During 2020, Ms. Smursch attended two conventions. The first, held in Toronto, dealt with using
accounting software. For this convention, her conference fees and travel costs were $2,400.
The second convention, held in Beirut, Lebanon, dealt with war zone vacations for tourists in
the Middle East. The costs for this convention were $7,400. She incurred no costs for meals or
entertainment during the convention as she stayed with family in Beirut.
In addition to her professional income, Ms. Smursch owns 2,500 units of Realty Income Trust.
These units were acquired on December 31, 2019, at a cost of $43 per unit. During 2020, she
received a distribution of $3.50 per unit, of which $1.50 was a return of capital and the remainder
was property income. The distribution was reinvested at a price of $45 per unit.
On December 31, 2020, all units are sold for proceeds of $129,333.
For tax purposes, Ms. Smursch uses the billed basis of revenue recognition.
Required: Determine Ms. Smursch’s minimum Net Income For Tax Purposes for the year
ending December 31, 2020. Ignore GST/HST considerations and the need to make CPP
contributions by Ms. Smursch.

(Foreign Property Income, Income Trusts, And Mutual Funds)
Late in 2019, Ms. Betty Tang sells her Vancouver residence for $780,000. It is her intention to not
replace this property and, in future years, she plans to rent a unit in a downtown condominium
building.
On January 1, 2020, she invests the proceeds from the sale as follows:
Foreign Term Deposit She acquires a U.K. Pound Sterling (£) term deposit with
a maturity value of £200,000 at a Canadian dollar cost of $340,000. Assume that
throughout 2020, £1 = $1.70.
Income Trust Units She acquires 8,000 units of the B&B real estate investment trust.
The units are acquired at a cost of $30 per unit.
Common Shares She acquires 2,000 shares of Liberty Inc., a publicly traded company,
at a total cost of $100,000.
Mutual Fund Units She acquires 2,500 units of Temple Small Cap, a mutual fund
trust. The cost is $40 per unit.
The following transactions occur during the year ending December 31, 2020:
Foreign Term Deposit On December 31, 2020, annual interest is paid at the rate of
7 percent. The U.K. authorities withhold 25 percent of this amount, with the remainder
being remitted to Betty.
B&B Trust Units The trust has a distribution of $1.50 per unit. Of this total $0.50
represents a return of capital, with the remainder being property income. Betty invests
the entire distribution in additional units at a cost of $52 per unit.

Liberty Inc. The Liberty Inc. shares pay an eligible dividend of $1.60 per share.
Temple Small Cap The trust has a distribution of $2.40 per unit. All of this distribution
is reinvested to acquire additional Temple units at $38 per unit. The composition of the
distribution is as follows:
Capital Gains $0.40
Eligible Dividends 1.00
Interest 1.00
Total Per Unit $2.40
Betty has other investment income that places her in the 29 percent federal tax bracket. Taxes
on this income are sufficient to use all of her available tax credits before considering the effects
of the investments described above. She lives in a province where the maximum rate is 16 per-
cent and the dividend tax credit on eligible dividends is 30 percent of the gross up.
Required: Calculate the amount of Taxable Income and Tax Payable that will result from the
described distributions. In addition, indicate the per unit adjusted cost base for each of the two trust
units on December 31, 2020. Ignore any tax implications resulting from the Canada/U.K. tax treaty.

Jeremy Bromont is 67 years old and has been married to Sandra Bromont for over 40 years.
Sandra is 65 years old and has Net Income For Tax Purposes of $8,400. This consists of OAS
payments of $6,000 (for less than a year) and pension income from an RPP. She has not, at this
point in time, applied for CPP.
Jeremy and Sandra have two children:
Sarah Sarah is 36 years old and has been blind since birth. She has no income of her
own, lives with them, and is totally dependent on Jeremy and Sandra.
Samantha Samantha is 38 years old and has recently gone through a messy divorce.
She has custody of the two pre-teen children of the marriage and her only source of
income is $24,000 in child support from her former husband. As this is not enough for
her to maintain a separate residence, she and her children live with Jeremy and Sandra
and currently rely on them for support.
As she is dedicated to becoming self-supporting, she is currently working on an MBA.
She began full time attendance in September of this year. Jeremy paid her tuition cost
of $16,400. Samantha has agreed to transfer any unused tuition credit to Jeremy.
The family’s medical expenses, all of which have been paid by Jeremy, are as follows:
Jeremy $ 4,000
Sandra 1,700
Sarah 9,400
Samantha 1,800
Total Medical Expenses $16,900
Jeremy has a number of different sources of income. They are as follows:

Pension Income During 2020, Jeremy receives $32,500 from an RPP sponsored by
a former employer.

Employment During 2020, Jeremy’s gross wages from his current employer were
$74,000. The employer withheld the following amounts from these wages:
RPP Contributions $5,600

EI Premiums 856
Union Dues 896
Annual United Way Contributions 2,400
OAS And CPP Jeremy has not applied for OAS as he is aware that it would all be
clawed back. He has deferred applying for CPP in order to receive the enhanced benefits
that accrue with later application.
Dividends During 2020, Jeremy received the following dividends (all amounts are in
Canadian dollars):
Eligible Dividends From Taxable Canadian Corporations $ 8,600

Non-Eligible Dividends On Shares In His Sister’s CCPC 6,400
Dividends On Foreign Shares - Net Of 15 Percent Withholding 13,600
Total Dividends Received $28,600
Interest During 2020, Jeremy had interest income of $3,420.

Business Income Four years ago, Jeremy started a management consulting business.
To house this business, he acquired a new building at a cost of $523,000 of which
$123,000 was the estimated value of the land. The building is allocated to a separate
CCA Class 1. On January 1, 2020, the UCC for this class is $342,837. He acquired
furniture and fixtures for the building at a cost of $30,000. The Class 8 UCC on January 1,
2020, is $10,564.
During 2020, he spends $62,000 upgrading and improving the building. In addition, he
sells some old furniture and fixtures for $23,200 (capital cost $25,000) and acquires
replacement furniture and fixtures for $47,000.
As Jeremy has no reason to keep detailed accounting records, he records business
income on a cash basis. For 2020, his net cash flow from operations was $187,000.
Relevant figures for the beginning and end of 2020 are as follows:
January 1 December 31
Billed Receivables $23,200 $26,700
Unbilled Work-In-Process 28,900 31,300
Accounts Payable 15,600 14,200
At the inception of the business, Jeremy leased a car for business purposes. After
the lease agreement expired, he acquired a new car on January 1, 2020, at a cost of
$72,500. He financed the car through his bank and, during 2020, he made payments on
the loan of $14,400. All of this amount was deducted in determining his net cash flow
from operations. Of the total, $5,100 represented payments for interest. Jeremy paid
car operating costs totaling $12,600 during 2020.
Required: Calculate Jeremy’s 2020 minimum Net Income For Tax Purposes, his 2020 mini-
mum Taxable Income, and his 2020 minimum federal Tax Payable. Ignore GST/HST/PST consid-
erations and the possibility of pension income splitting.


Mr. Derek Fontaine is married and has three children. His wife, Emily, works as a personal fit-
ness trainer on a part time basis and, for 2020, her Net Income For Tax Purposes is $9,500. His
two youngest children, Brad and Barbara, are twins. They are 14 years old and, unfortunately,
Brad has been blind since birth. Neither child has any income of their own.
His other son, Bill, is 19 years old and attends university on a full time basis for 10 months of the
year. His tuition fees total $8,500. Bill has income from part time jobs of $10,000 during 2020.
Bill has agreed to transfer the maximum amount of the tuition credit to his father.
Eligible medical expenses for Derek’s family, all of which were paid by Derek, are as follows:
Derek $ 1,400
Emily 1,600
Brad (No attendant care included) 11,400
Barbara 2,300
Bill 4,600
The Fontaines had always lived in rented premises. However, because the current level of
mortgage rates makes purchasing a home attractive, they purchase a residence at a cost of
$625,000. They move in on September 1, 2020.
Derek has a management consulting business that he operates out of a building that he owns.
For the taxation year ending December 31, 2020, the business has an accounting Net Income of
$211,000. Other information about this business is as follows:
1. Expenses include $11,500 in business meals and entertainment.
2. Derek owns a car that is used in the business. It was purchased on January 1, 2020, for
$46,000. Operating costs for 2020 totaled $4,800. All of these costs were deducted in
determining the accounting Net Income of the business. During this year, the car was driven
32,000 kilometres, of which 23,000 related to Derek’s business activities.
3. The building that is used in the business is a new building that was purchased in 2018. It has
a January 1, 2020, UCC of $450,000. Derek’s business uses 100 percent of the space in the
building. The furniture and fixtures in the building have a January 1, 2020, UCC of $42,000.
During 2020, additional furniture was acquired at a cost of $12,000. It replaced furniture that
had cost $10,000. Derek sold the used furniture for $3,000.
4. Amortization of $18,000 was deducted in determining accounting Net Income. This included
amortization on the car, the furniture and fixtures, and the building.
In addition to operating his business, Derek has been an active investor in various types of secu-
rities. Information on his holdings is as follows:
Breax Common Shares On January 1, 2020, Derek holds 2,500 shares of this
company. They have an adjusted cost base of $130,000. On February 1, 2020, he sells
1,000 of these shares for $65 per share. On July 1, 2020, he acquires an additional
1,200 shares at $54 per share. During 2020 he receives eligible dividends on these
shares totaling $8,000.
Realco Income Trust On January 1, 2020, Derek holds 5,000 units of this income trust. The
adjusted cost base of these units is $150,000. During 2020, these units have a distribution
of $2.50 per unit. Of this total, $1.00 represents a return of capital, with the other $1.50
consisting of property income. Derek uses the entire distribution to acquire additional units
in the trust at $32 per unit.
Debt Security On July 1, 2019, Derek purchases a debt security with a maturity value
of $100,000. The security matures on June 30, 2024, and bears interest at 8 percent

per annum. Interest for the first 18 months is paid on December 31, 2020, with the
remaining interest due when the security matures on June 30, 2024.
Foreign Term Deposit On January 1, 2020, Derek owns a foreign currency term
deposit with a maturity value of $250,000. During the year, the term deposit earns
interest of $20,000. Taxation authorities in the foreign jurisdiction withhold $8,000 of
this amount. All amounts are in Canadian dollars.
Required: Calculate Mr. Fontaine’s 2020 minimum Net Income For Tax Purposes, his 2020
minimum Taxable Income, and his 2020 minimum federal Tax Payable. Ignore GST/HST/PST con-
siderations and the need to make CPP contributions by Derek and Emily.

SSS Problem Seven–2


(Interest Deductibility - 4 Cases)
Each of the following independent Cases involves the payment of interest and the issue of whether
the interest will be deductible for tax purposes.
Case A Martin Duck borrows $300,000 and invests the entire proceeds of the loan in
publicly traded securities. After three months, the value of the securities has fallen to
$110,000. At this point, Mr. Duck sells the securities and uses the proceeds to reduce the
loan to $190,000.
Now that he no longer owns the securities, can he still deduct the interest on the loan?
Explain your conclusion.
Case B Janet Forest owns a portfolio of securities with a current value of $190,000.
Using her margin balance available from her stockbroker, she borrows $30,000 to finance
the purchase of a sailboat. During the period the margin loan is outstanding, she pays
interest of $900.
Can she deduct this interest against the $5,000 in income earned during this period on
her portfolio of securities? Explain your conclusion.
Case C Martin Brock borrows $42,000 and uses the funds to acquire an income
producing property. He later sells the property for $110,000. He uses these proceeds to
purchase two properties. Property A costs $45,000 and property B costs $65,000.
How will the $42,000 in borrowing be linked to the two properties?
Case D Chuck Masters borrows $100,000 and uses the funds to acquire an income
producing property. He later sells the property for $80,000. He uses the $80,000 to
purchase two properties. Property A costs $20,000 and property B costs $60,000.
How will the $100,000 in borrowing be linked to the two properties?

(Rental Income)
In the past few years, Mr. Stanton has invested his excess funds in various residential rental
properties in Windsor. Given the economic situation in the city at the time, he was able to purchase
several foreclosed properties at very low prices. At the beginning of 2020, he owned four
properties, as well as some furnishings used in one of the older buildings.
The relevant information on these rental properties for 2020 is as follows:
Furniture The furniture was used in the building at 18 Prince Street. It had a capital
cost of $15,000, a UCC of $8,000 at the beginning of the year, and was sold during the
year for $5,000.

18 Prince Street This building had a capital cost of $42,000. It was sold on August 1.
For CCA purposes, it was included in the same Class 1 pool as 4 McManus Street. Of
the sale proceeds, $60,000 was allocated to the building. From January 1 to July 31, the
building generated rents of $6,000 and incurred property taxes of $1,200, interest
charges of $1,750, and other expenses (excluding CCA) of $1,000.
4 McManus Street This building has a capital cost of $45,000. At the beginning of the
year, the UCC of this Class 1 pool, which included both 4 McManus Street and 18 Prince
Street, was $50,000. During the year, it generated rents of $5,000 and incurred property
taxes of $1,550, interest charges of $650, and other expenses (excluding CCA) of
$2,500.
94 George Street This building has a capital cost of $650,000. Its UCC at the
beginning of the year was $550,000. During the year, it generated rents of $42,000 and
incurred property taxes of $5,200, interest charges of $7,800, and other expenses
(excluding CCA) of $8,500.
125 West Street This building has a capital cost of $102,000. Its UCC at the begin-
ning of the year was $98,000. During the year, the unit generated rents of $10,000 and
incurred property taxes of $1,750, interest charges of $5,000, and other expenses
(excluding CCA) of $4,000.
Within the next year, Mr. Stanton expects to sell 4 McManus and 125 West for double what he paid
for the properties.
Required: Calculate Mr. Stanton’s net rental income for 2020. You should provide a separate
calculation for each property. Specify how much CCA should be taken for each building.

(Dividend vs. Interest Income)
Bill Martin, Dave Martin, and Charles Martin are three brothers living in the same province. They
each have $20,000 that they wish to invest. Because of differences in their current employment
situations, they are in different tax brackets. These brackets are as follows:
Federal Provincial
Tax Bracket Tax Bracket
Bill Martin 15.0 Percent 6.0 Percent
Dave Martin 20.5 Percent 9.5 Percent
Charles Martin 29.0 Percent 14.0 Percent
The provincial dividend tax credit on eligible dividends is equal to 30 percent of the dividend gross
up.
For a number of years, they have been interested in the securities of Moland Industries, a
Canadian public corporation, and, on January 1 of the current year, they are considering two
securities of the company that are currently outstanding. These securities and their investment
characteristics are as follows:
Bonds The company has a large issue of debenture bonds that has a coupon interest
rate of 6 percent. They are selling at par value and mature in 18 years.

Preferred Shares The company has an issue of preferred shares that is offering an
eligible dividend of 4 percent based on the current market price. The dividend is
cumulative, but not participating.
The income from these investments would not move any brother to a higher federal or provincial
tax bracket. Each brother has sufficient income to use all of his available tax credits.
Required: Advise each of the Martin brothers as to which investment he should make. As part of
your recommendation, calculate the after tax income that would be generated for each of the
brothers during the current year, assuming that he invests his $20,000 in:
A. the Moland Industries bonds.
B. the Moland Industries preferred shares.

(Income Trusts And Mutual Funds)
On January 1, 2020, Mr. Irwin Mendez acquires the following investments:
• 2,500 units of the Realty Income Trust. The cost is $35.00 per unit for a total cost of
$87,500.
• 3,500 units of the Pickett Global Fund, a mutual fund trust. The cost is $54.00 per unit for a
total cost of $189,000.
During 2020, the Realty Income Trust makes an annual distribution of $2.75 per unit, of which $.75
is designated as a return of capital. The remaining $2.00 is ordinary income. Irwin has elected to
use the trust’s DRIP and, as a consequence, the entire distribution is reinvested in new trust units
at a cost of $36.00 per unit.
Also during 2020, the Pickett Global Fund makes a distribution of $4.50 per unit. This distribution is
made up of capital gains of $2.00, eligible dividends of $1.75, and a return of capital of $0.75. The
entire distribution is reinvested in Pickett Global Fund units at a cost of $50.00 per unit.
Irwin has other investment income that places him in the 29 percent federal tax bracket. Taxes on
this income are sufficient to use all of his available tax credits before considering the effects of the
two investments described above. He lives in a province where the maximum rate is 13 percent
and the tax credit on eligible dividends is 24 percent of the gross up.
distributions by the two trusts. In addition, indicate the per unit adjusted cost base for each of the
trust units on December 31, 2020.

(Foreign Property Income, Income Trusts, And Mutual Funds)
On January 1, 2020, Mr. Bradley Temrik acquires the following investments:
Foreign Currency Term Deposit A £225,000 term deposit that pays interest at
5 percent per annum. On December 31, 2020, interest of £11,250 is paid on this term
deposit. The taxation authorities in the U.K. withhold 25 percent of this payment, with the
remaining 75 percent being remitted to Bradley. Assume that throughout 2020, £1 = $1.70.
Income Trust Units 4,500 units of Canadian Realty Trust at $56 per unit. The total cost
is $252,000.

Mutual Fund Units 6,200 units of Fidelitee Large Cap at $32 per unit. The total cost is
$198,400.
During the year ending December 31, 2020, the following additional transactions occur:
Canadian Realty Trust This trust has a distribution of $5.20 per unit. Of this total, $2.40
represents a return of capital, with the remainder being business income. Mr. Temrik
reinvests the entire amount that he receives in additional units at a cost of $59 per unit.
Fidelitee Large Cap This mutual fund has a distribution of $3.75 per unit. This is made
up of capital gains of $1.00 per unit, interest of $1.25 per unit, and eligible dividends of
$1.50 per unit. All of this distribution is reinvested to acquire additional units of Fidelitee at
$28 per unit.
Bradley has other investment income that places him in the 29 percent federal tax bracket. Taxes
on this income are sufficient to use all of his available tax credits before considering the effects of
the investments described above. He lives in a province where the maximum rate is 16 percent and
the tax credit on eligible dividends is 30 percent of the gross up.
interest on the term deposit and the distributions by the two trusts. In addition, indicate the per unit
adjusted cost base for each of the two trust units on December 31, 2020. Ignore any tax
implications resulting from the Canada/U.K. tax treaty.

Mr. Jean Benoit is 67 years of age, is married, and has two children. His spouse, Suzie, turned 65
during 2020. Her Net Income For Tax Purposes for the year is $6,250. This is made up of OAS
benefits of $2,000 and $4,250 in pension income. During 2020, Suzie attends university on a full
time basis for 10 months of the year. Jean paid her tuition fees of $7,800.
Jean’s daughter, Sylvie, is 29 years of age and has a disability that qualifies her for the disability
tax credit. For 2020, her Net Income For Tax Purposes is nil. She lives with Jean and is totally
dependent on him.
Jean’s son, Pierre, is 26 years of age. Because of difficulties with anger management, he has been
unemployed for the last three years. During 2020, his Net Income For Tax Purposes is nil, he lives
in the family residence, and is completely dependent on his father.
The family’s medical expenses, all of which have been paid by Jean, are as follows:
Jean $ 3,240
Suzie 1,850
Sylvie 10,550
Pierre 4,320
Total Medical Expenses $19,960
During 2020, Jean makes contributions to registered charities of $4,450 and contributions to the
federal Conservative Party in the amount of $870.
For many years Jean was employed as an engineer by a large Canadian public company. He
retired when he turned 65 and, during 2020, receives income from this employer’s pension plan of
$37,000. In addition, he has retained options to acquire 5,000 of his employer’s shares at a price of
$12 per share. When the options were granted the shares were trading at $12 per share.

On July 1, 2020, Jean exercises all of these options. At this time the shares are trading at $21 per
share and Jean immediately sells the shares for that price. The employer did not deduct EI
premiums or CPP contributions on behalf of Jean.
Jean received CPP benefits of $10,000 in 2020. Since Jean has had income of over $150,000 for
the last five years and anticipates income at this level for the rest of his life, he has not applied to
receive OAS benefits.
During 2020, Jean received the following dividends (all amounts in Canadian dollars):
Eligible Dividends From Taxable Canadian Corporations $ 9,250

Non-Eligible Dividends On Shares In His Brother’s CCPC 4,670
Dividends On Foreign Shares - Net Of 10 Percent Withholding 7,785
Total Dividends Received $21,705
In addition to dividends, Jean had 2020 interest income of $8,742.

Because of the continuing financial needs of his family, after his retirement from his employer, Jean
started an engineering services business. In 2017 he acquired a new building to be used as an
office for his business. The building cost $320,000, of which $80,000 was the estimated value of
the land. It was allocated to a separate CCA Class 1. On January 1, 2020, the UCC of the building
is $230,000.
The building contains office furniture and fixtures that were acquired at a cost of $25,000. On
January 1, 2020, they have a UCC of $22,579.
During 2020, he spends $28,000 on improving and upgrading the building. In addition, he sells the
old furniture and fixtures for $12,500 and acquires replacement furniture and fixtures for $42,100.
As Jean has no reason to keep detailed accounting records, he records business income on a cash
basis. For 2020, his net cash flow from operations was $67,500. Relevant figures for the beginning
and end of 2020 are as follows:
January 1 December 31
Billed Receivables $12,800 $15,400
Unbilled Work-In-Process 15,600 17,800
Accounts Payable 4,500 5,250
Until 2020, Jean has used his personal vehicle for business purposes. However, as of January 1,
2020, he leases an automobile with a manufacturer’s list price of $47,000. The lease payment,
which does not include any payment for insurance, is $810 per month. No down payment or
security deposit is required on the lease and he is not required to purchase the car at the end of the
lease term. The lease payments were deducted in the determination of his net cash flow from
operations. The car is used 100 percent for business activity.
Required: Calculate Mr. Benoit’s 2020 minimum Net Income For Tax Purposes, his 2020
minimum Taxable Income, and his 2020 minimum federal Tax Payable. Ignore GST/HST/PST
considerations and the possibility of pension income splitting.

Solution to SSS Problem Seven–2

Case A
Under ITA 20.1 (disappearing source provision), the $190,000 balance will be deemed to be used
to produce income. Therefore, he can continue to deduct the interest.
Case B
While the loan is secured by income producing assets, the direct purpose of the loan was not
income producing. The interest cannot be deducted.
Case C
Since the proceeds exceed the borrowings, Mr. Brock has complete flexibility with respect to
linking. He could allocate all of the $42,000 to property A or B or alternatively, $21,000 to each. Any
allocation totaling $42,000 would be acceptable.
Case D
When the value of the replacement property is less than the amount borrowed, the taxpayer must
use a pro-rata allocation of the borrowed money. In this case, the result would be an allocation of
$25,000 [($20,000 ÷ $80,000)($100,000)] to property A and an allocation of $75,000 [($60,000 ÷
$80,000)($100,000)] to property B.

Rental And Other Income
The required net rental income information can be calculated as follows:
18 Prince 4 McManus 94 George 125 West

Street Street Street Street
Rental Revenues $6,000 $5,000 $42,000 $10,000
Property Taxes ( 1,200) ( 1,550) ( 5,200) ( 1,750)
Interest Charges ( 1,750) ( 650) ( 7,800) ( 5,000)
Other Expenses (Excluding CCA) ( 1,000) ( 2,500) ( 8,500) ( 4,000)
Rental Income (Loss) Before CCA $2,050 $ 300 $20,500 ($ 750)
The terminal loss for Class 8 would be calculated as follows:

Opening UCC $8,000
• Cost = $15,000
• Proceeds Of Disposition = $5,000 ( 5,000)
Balance With No Remaining Assets In The Class $3,000
Terminal Loss On Class 8 Assets ( 3,000)
CCA Base Nil

The calculation of net rental income would be as follows:

Rental Income (Loss) Before CCA
($2,050 + $300 + $20,500 - $750) $22,100
Terminal Loss On Class 8 Assets ( 3,000)
Income Before CCA $19,100
CCA (See Following Discussion) ( 19,100)
Net Rental Income Nil
CCA Deduction
As 18 Prince and 4 McManus each cost less than $50,000, they can be grouped into a single CCA
Class 1. The opening UCC in this Class 1 would be $50,000 and, when the $42,000 capital cost of
18 Prince is deducted, a balance remains. This means that there will be no recapture on the sale of
18 Prince.
Maximum available CCA would be calculated as follows:
4 McManus [(4%)($50,000 - $42,000)] $ 320
94 George [(4%)($550,000)] 22,000
125 West [(4%)($98,000)] 3,920
Total Available $26,240
As the deduction of CCA cannot be used to create a rental loss and, as a consequence, the actual
deduction would be limited in this situation to $19,100, the net amount of rental income on the four
properties. This is less than the maximum available of $26,240, resulting in a situation in which
there are various possibilities with respect to how much of the $19,100 will be deducted from the
buildings in each Class 1.
In general, CCA should be taken on assets with a lower rate first in order to leave more flexibility in
the future. However, in this case, all the rates are the same.
Since Mr. Stanton intends to sell 4 McManus and 125 West in the near future for proceeds that are
greater than the UCC in their respective Class 1 pools, he should not take CCA on those classes
this year as it would increase the recapture in the following year.
Even if he did not plan on selling any of the properties, it would probably leave him more future
flexibility if the $19,100 was taken from 94 George Street, the class with the largest UCC.
Note that even though 125 West generated a net rental loss of $750, CCA could still be taken on
that class as there was rental income before CCA when all rental properties were considered.

In addition to the rental income, there is a taxable capital gain on the sale of 18 Prince Street of
$9,000 [(1/2)($60,000 - $42,000)].

Part A
The combined tax rates for the three brothers are 21 percent (15% + 6%), 30 percent (20.5% +
9.5%), and 43 percent (29% + 14%). Given these rates, the after tax returns on the bonds would be

Bill (21%) Dave (30%) Charles (43%)

Interest [(6%)($20,000)] $1,200 $1,200 $1,200
Federal/Provincial Tax Payable
At 21, 30, And 43 Percent ( 252) ( 360) ( 516)
After Tax Return $ 948 $ 840 $ 684
Part B
The after tax returns resulting from an investment in the Moland Industries preferred shares begins
with the calculation of the federal and provincial Tax Payable:

Dividends [(4%)($20,000)] $ 800 $ 800 $ 800
Gross Up Of 38 Percent 304 304 304
Taxable Dividend $1,104 $1,104 $ 1,104
Combined Rate (See Part A) 21% 30% 43%
Tax Before Dividend Tax Credit $ 232 $ 331 $ 475
Dividend Tax Credit
[(6/11 + 30%)($304)] ( 257) ( 257) ( 257)
Tax Payable (Tax Savings) ($ 25) $ 74 $ 218
Based on the preceding calculations of federal and provincial Tax Payable, the after tax returns on
the preferred shares are calculated as follows:
Dividends [(4%)($20,000)] $800 $800 $800
Tax Savings (Tax Payable) 25 ( 74) ( 218)
After Tax Return $825 $726 $582
Comparison
A comparison of the after tax rates of return can be made as follows:

After Tax Interest $948 $840 $684
After Tax Dividends ( 825) ( 726) ( 582)
Advantage If Bonds Purchased $123 $ 114 $ 102
Recommendation
For each of the brothers, the bonds are the preferable investment as the after tax return is higher.
While the problem does not require comment on this, we would note that the bonds are also the
lower risk alternative.


Taxable Income And Tax Payable
The amount of Taxable Income and Tax Payable resulting from the two investments would be
Realty Distribution [($2.75)(2,500)] $6,875

Return Of Capital [($0.75)(2,500)] ( 1,875) $ 5,000
Pickett Capital Gain [($2.00)(3,500)] $7,000

Non-Taxable One-Half ( 3,500) 3,500
Pickett Eligible Dividends [($1.75)(3,500)] $6,125

Dividend Gross Up [(38%)($6,125)] 2,328 8,453
Pickett Return Of Capital [($.75)(3,500) = $2,625] Nil

Tax Rate (29% + 13%) 42%
Tax Before Dividend Tax Credit $ 7,120
Dividend Tax Credit [($2,328)(6/11 + 24%)] ( 1,829)
Tax Payable $ 5,291
Adjusted Cost Base - Realty

The reinvestment of the $6,875 distribution at $36.00 per unit would acquire an additional 190.97
units. After recognizing these changes, the adjusted cost base per unit would be as follows:
$34.37 [($87,500 + $6,875 - $1,875) ÷ (2,500 + 190.97)]
Adjusted Cost Base - Pickett

The reinvestment of the $15,750 [($4.50)(3,500)] distribution at $50.00 per unit would acquire an
additional 315 units. After recognizing these changes, the adjusted cost base per unit would be as
follows:
$52.98 [($189,000 + $15,750 - $2,625) ÷ (3,500 + 315)]

Note This problem is somewhat unrealistic in that, under the Canada/U.K. tax treaty, it is
unlikely that there would be any amounts withheld on interest payments between the two
countries (see Chapter 20).
Note that this problem does not contain enough information to do a complete calculation of
the foreign tax credit, which is not covered until Chapter 11. We have assumed that the
credit is equal to the maximum 15 percent of the amount withheld.

Taxable Income And Tax Payable

The amount of Taxable Income and Tax Payable resulting from the investments would be calcu-
lated as follows:
Interest On Term Deposit [(£11,250)($1.70)] (Note) $19,125

Excess Withholding [(25% - 15%)(£11,250)($1.70)] ( 1,913) $17,212
Canadian Realty Trust Distribution [($5.20)(4,500)] $23,400
Return Of Capital [($2.40)(4,500)] ( 10,800) 12,600
Fidelitee Capital Gain [($1.00)(6,200)] $ 6,200
Non-Taxable One-Half ( 3,100) 3,100
Fidelitee Eligible Dividends [($1.50)(6,200)] $ 9,300

Dividend Gross Up [(38%)($9,300)] 3,534 12,834
Fidelitee Interest [($1.25)(6,200)] 7,750
Tax Rate (29% + 16%) 45%
Dividend Tax Credit [($3,534)(6/11 + 30%)] ( 2,988)
Foreign Tax Credit [(15%)(£11,250)($1.70)] (Note) ( 2,869)
Tax Payable $18,216
Note - Foreign Source Property Income As required, 100 percent of the foreign
interest is included in Net Income For Tax Purposes. However, for individuals, the credit
against Tax Payable that is provided under ITA 126(1) is limited to a maximum of
15 percent of the foreign source non-business income. Since the withheld amount
exceeds 15 percent, the excess is deducted and does not qualify for treatment as a
foreign tax credit.
Adjusted Cost Base - Canadian Realty Trust

The reinvestment of the $23,400 [($5.20)(4,500)] distribution at $59 per unit would acquire an
additional 396.61 units. After recognizing these changes, the adjusted cost base per unit would be
as follows:
$54.04 [($252,000 + $23,400 - $10,800) ÷ (4,500 + 396.61)]
Adjusted Cost Base - Fidelitee Large Cap

The reinvestment of the $23,250 [($3.75)(6,200)] distribution at $28 per unit would acquire an
additional 830.36 units. After recognizing these changes, the adjusted cost base per unit would be
as follows:
$31.53 [($198,400 + $23,250) ÷ (6,200 + 830.36)]

Employment Income
While Jean is no longer an employee, he can claim the Canada Employment tax credit as the
exercise of the options creates employment income calculated as follows:
Fair Market Value Of Shares [(5,000)($21)] $105,000
Exercise Cost [(5,000)($12)] ( 60,000)
Employment Income $ 45,000

Capital Gains
While Jean sold the shares he acquired through stock options, they were sold immediately,
resulting in no capital gain or loss on the disposition.
Property Income
Jean’s property income is calculated as follows:
Eligible Dividends Received $ 9,250
Gross Up Of Eligible Dividends (38%) 3,515
Non-Eligible Dividends Received 4,670
Gross Up Of Non-Eligible Dividends (15%) 701
Gross Foreign Dividends ($7,785 ÷ 90%) 8,650
Interest 8,742
Property Income $35,528
Net Business Income

Jean’s net business income is calculated as follows:
Income On Cash Flow Basis $67,500
December 31 Receivables 15,400
January 1 Billed Receivables ( 12,800)
December 31 Work-In-Process (Note 1) 17,800
January 1 Work-In-Process ( 15,600)
December 31 Accounts Payable ( 5,250)
January 1 Accounts Payable 4,500
Accrual Based Income $71,550
CCA ($13,396 + $16,320) (Note 2) ( 29,716)
Non-Deductible Lease Payments (Note 3) 2,421
Net Business Income $44,255
Note 1 Since Jean is an engineer, he was not able to use the billed basis of income
recognition. This means that he is not eligible for the transitional provision related to the
billed basis and must include 100 percent of his unbilled work-in-progress in his income.
Note 2 The CCA for the furniture and fixtures (Class 8) would be calculated as follows:
January 1, 2020, UCC $22,579

Additions 42,100
Disposals - Lesser Of:
• Proceeds Of Disposition = $12,500
• Capital Cost = $25,000 ( 12,500)
AccII Adjustment [(50%)($42,100 - $12,500)] 14,800
Base For CCA $66,979
Rate 20%
CCA $13,396

The CCA for the building (Class 1) would be calculated as follows:

January 1, 2020, UCC $230,000
Additions (Improvements) 28,000
Base For CCA $272,000
Rate 6%
CCA $ 16,320
As the building was acquired new and was used 100 percent for non-residential
purposes, it is eligible for the 6 percent CCA rate. The fact that it was the only building
owned by the business would result in it automatically being allocated to a separate
class, but it must remain in a separate Class 1 to continue to qualify for the 6 percent
rate.
Note 3 The total deductible car lease payment is the least of:
• $9,720 [(12)($810)] - the actual amount paid
• $9,600 [($800)(12)] - the annual limit using the $800 monthly maximum
• $7,299 {[($810)(12)] [$30,000 ÷ (85%)($47,000)]} - the deductible limit using the $47,000
manufacturer’s list price
Using the manufacturer’s list price limit, the amount that must be added back to income
for the year is $2,421 ($9,720 - $7,299).

Mr. Benoit’s Net Income For Tax Purposes would be calculated as follows:
Employment Income $ 45,000
Property Income 35,528
Net Business Income 44,255
Pension Income 37,000
CPP Benefits 10,000
Taxable Income
Jean’s Taxable Income would be calculated as follows:

Stock Option Deduction [(1/2)($45,000)] ( 22,500)

Tax Payable
Tax Payable would be calculated as follows:
Tax On First $97,069 $17,230
Tax Credits:
Basic Personal Amount (Jean Benoit) ($13,229)
Spouse ($13,229 - $6,250) ( 6,979)
Canada Caregiver - Sylvie ( 7,276)
Jean’s Age Credit [$7,637 - (15%)($171,783) - $38,508)] Nil
Jean’s Pension Credit ( 2,000)
Transfer Of Spouse’s Age Credit
[$7,637 - (15%)($6,250 - $38,508)] ( 7,637)
Transfer Of Spouse’s Pension Credit ( 2,000)
Transfer Of Spouse’s Tuition - Lesser Of:
• Actual Tuition Cost Of $7,800
• Absolute Maximum Of $5,000 ( 5,000)
Transfer Of Sylvie’s Disability Credit ( 8,576)
Medical Expenses (Note 4) ( 17,563)
Rate 15% ( 10,726)
Charitable Donations (Note 5)
[(15%)($200) + (29%)($4,450 - $200)] ( 1,263)
Dividend Tax Credit On:
Eligible Dividends [(6/11)($3,515)] ( 1,917)
Non-Eligible Dividends [(9/13)($701)] ( 485)
Foreign Tax Credit (Amount Withheld = 10 Percent) ( 865)
Political Contributions [(3/4)($400) + (1/2)($350) + (1/3)($120)] ( 515)
Note 4 The claim for medical expenses is determined as follows:

Expenses Of Jean And Suzie ($3,240 + $1,850) $ 5,090
• [(3%)($171,783)] = $5,153
Balance Before Dependants 18 And Over $ 2,693
Pierre’s Medical Expenses $ 4,320
• $2,397
• [(3%)(Nil)] = Nil Nil 4,320
Sylvie’s Medical Expenses $10,550

• $2,397
• [(3%)(Nil)] = Nil Nil 10,550
Total Medical Expense Claim $17,563
Note 5 As none of his income is taxed at 33 percent, this rate will not be applicable to
the calculation of the charitable donations tax credit.

Self Study Problem Eight - 2

(Identical Properties)
Martin Blair has purchased the shares of two companies over the years. Each company has only
one class of shares. Purchases and sales of shares in the first of these companies, Marek Ltd.,
are as follows:
March 2014 purchase 650 @ $11
September 2015 purchase 922 @ 13
May 2017 purchase 480 @ 17
November 2017 sale (610) @ 21
July 2020 purchase 240 @ 18
October 2020 sale (460) @ 12
Purchases and sales of shares in the second company, Dunsmore Inc., are as follows:
April 2019 purchase 2,200 @ $12
December 2019 purchase 1,450 @ 17
July 2020 sale (2,840) @ 22
Required:
A. Determine the cost to Mr. Blair of the Marek Ltd. shares that are still being held on December 31,
2020.
B. Determine the taxable capital gain resulting from the July 2020 disposition of the Dunsmore
Inc. shares.

(Warranties On Capital Assets)
On May 1, 2019, Mr. Rowe sold a parcel of suburban land to a developer for $2,600,000. The
land had cost Mr. Rowe $1,400,000 15 years ago, and no additions or improvements had been
made to the land. He classifies any gain on the land sale as a capital gain. In order to convince
the purchaser that he should pay the full $2,600,000 in cash, Mr. Rowe has agreed to refund a
part of the purchase price if less than 100 lots are sold by December 1, 2020.
Specifically, the agreement calls for a refund of $26,000 for each of the 100 lots that is not sold
within the specified period. At the time of the sale, Mr. Rowe estimates that he will probably
have to pay $104,000 to the purchaser on December 1, 2020.
Over the next two years, a number of plants in the area are closed, substantially reducing the
demand for the lots in the development. By December 1, 2020, only 60 lots have been sold and
Mr. Rowe is obliged to pay the purchaser $1,040,000 [($26,000)(40 Lots)] as agreed.
Required: Describe the tax effects associated with the sale of the land and the guarantee
provided by Mr. Rowe at the time the land is sold and with the payment that he is required to
make on December 1, 2020. Include the effects of this payment on the Tax Payable of other
years.


(Capital Gains Reserves)
Ms. Helm acquired two tracts of land near Ottawa five years ago. Tract A cost $71,000, while Tract B
cost $87,000.
On July 1, 2020, Tract A is sold for $127,000. The terms of the sale require a down payment of
$17,000. A payment of $25,000 is required on January 1, 2021.
Also on July 1, 2020, Tract B is sold for $106,000. The terms of the sale require a down payment
of $32,000. No further payment on the principal amount is required for five years.
Required: Determine the amount of the minimum taxable capital gain that will have to be
included in Ms. Helm’s Net Income For Tax Purposes for both 2020 and 2021.

(Capital Gains Reserves)
Several years ago, Ms. Natasha Simone acquired an existing building to be used in her unincor-
porated business. The total cost of the property was $1,200,000, with $250,000 of this amount
representing the estimated fair market value of the land on which the building was situated.
Natasha had suffered from serious bouts of depression in the past and realized that the stress
from running her business was putting her mental health at risk. As a consequence, she decides
she must stop operations and sell the assets of the business.
On January 1, 2020, the building that was used in the business was sold for $1,500,000, with
$300,000 of this amount representing the estimated fair market value of the land on which the
building was situated. The January 1, 2020, UCC balance in Class 1 was $790,742. The building
was the only asset in this class.
The terms of the sale require the buyer to make a down payment at the time of purchase, with
the remaining balance payable on January 1, 2022. No payments are required in 2021. Interest
on the outstanding balance is paid on December 31 at an annual rate of 6 percent.
Natasha plans to use reserves to defer the payment of taxes on the capital gain that results from
this sale.
Required: Indicate the tax effects of these transactions on Natasha’s Net Income For Tax
Purposes for the years 2020, 2021, and 2022, assuming:
A. the down payment was equal to 10 percent of the sales price.
B. the down payment was equal to 30 percent of the sales price.

(Bad Debts On Capital Asset Sales)
Marjory Simpkins has decided to wind down her business, Simply Simpkins. The proprietorship
has a December 31 year end.
During December 2019, Mrs. Simpkins sold a non-depreciable capital asset that was used in
her business for $25,000. She had purchased the asset for $15,000. Mrs. Simpkins accepted a

down payment of $15,000 and a note for $10,000 due December 1, 2020. No interest payments
were required on the note and, because Mrs. Simpkins had very little other income during 2019,
she did not establish a capital gains reserve.
Beginning in September 2020, Mrs. Simpkins tried to locate the purchaser. She was not suc-
cessful and it appeared the purchaser had disappeared without a trace. As a reflection of this
fact, Mrs. Simpkins wishes to write off the bad debt in 2020.
Required: Determine the 2019 and 2020 tax effects resulting from the preceding events.

(Warranties, Bad Debts, and Reserves)
Lawrence Wallack owns a tract of undeveloped land near Perth, Ontario. It was acquired a num-
ber of years ago at a cost of $2,160,000.
On December 31, 2020, an Ottawa developer made Lawrence an offer of $6,680,000 for the
land, which he accepts.
In order to facilitate the transaction, Lawrence agrees to an initial payment of $2,180,000, fol-
lowed by annual payments of $1,500,000 on December 31 in each of the years 2021, 2022, and
2023. Interest, calculated at an annual rate of 4 percent on the opening balance for the year, is
also payable on December 31 of each of these years. Given this arrangement, Lawrence plans
to use capital gains reserves to defer taxes to the maximum extent possible.
To further facilitate the transaction, Lawrence agrees to share the developer’s risk by providing
a warranty against unsold lots. As the developer plans to divide the property into 200 individual
lots, Lawrence has agreed to reimburse the developer an amount of $20,000 for each lot that is
not sold by December 31, 2022.
By December 31, 2022, only 150 lots have been sold. As agreed, Lawrence pays the developer
$1,000,000 [(200 - 150)($20,000)] on December 30, 2022.
The interest and principal payments for 2021 and 2022 are made as required by the agreement.
During 2023, the developer is unable to sell any further lots and, on August 1, 2023, the devel-
oper declares bankruptcy. Lawrence does not anticipate being able to collect any of the remain-
ing balance on the loan or the final interest payment.
Required: Calculate the tax effects of the transactions that took place during 2020 through
2023 on Lawrence Wallack’s Net Income For Tax Purposes.

(Principal Residence Designation)
Alice Stewart has owned a large country home near Toronto since 2005. It was acquired at a
cost of $850,000.
Because of her growing need to spend time in the city, in 2013 she acquired a Toronto condo-
minium at a cost of $625,000.
At the beginning of 2020, she concludes that she would like to move to the west coast and,
to this end, she sells both of her Ontario properties. The country home is sold for $1,200,000

uring June 2020. The Toronto condominium is sold in July 2020 for $900,000. Real estate com-
d
missions of 5 percent of the sales price were charged on both transactions.
As Ms. Stewart has been the only individual to use these properties, either one could be des-
ignated as her principal residence for the relevant years. Ms. Stewart wishes to minimize any
capital gains resulting from the sale of the two properties.
Required: Describe how the residences should be designated in order to accomplish

Ms. Stewart’s goal. In addition, calculate the total amount of the gain that would arise under the
designation that you have recommended.

(Personal Use Property)
After a lengthy career as a successful stock market analyst, Ross Howard lost his job. While he
has searched extensively for a new position for more than a year, he has been unable to find
suitable employment. Given this, he begins to sell some of his prized possessions. The following
transactions occur during the current year:
• His beloved collection of limited edition fountain pens had a total cost of $42,000. However,
the proceeds from their sale to another collector, the sole interested party, amounted to
only $13,000. These pens were used largely for decorative purposes. They were all dis-
played on his work desk and he always carried one prominently in the pocket of his jacket or
shirt in order to impress clients.
• His first edition of Hemingway’s The Sun Also Rises had cost $12,000 and sold for $31,000.
• He had inherited a small Paul Borduas painting from his grandfather. The painting had cost
his grandfather $1,500. At the time of the bequest, its fair market value had increased to
$128,000. It is sold privately by Mr. Howard for $132,000.
• For several years he has driven a Bentley Flying Spur that cost $185,000. It is sold for $64,000.
• His antique Chris Craft race boat had cost $45,000 several years ago. It is sold for $62,000.
Required: Indicate the tax consequences of each of these dispositions. In addition, indicate
the total amount that will be included in Mr. Howard’s Net Income For Tax Purposes, as well as
any carry over amounts that can be used in previous or subsequent years.

(Capital Gains On Foreign Securities)
Ms. Barbara Laval sometimes makes investments on European stock exchanges that must be
paid for in Euros (€, hereafter). She is a Canadian resident and makes her purchases through a
Canadian brokerage account.
In July 2018, she acquires 3,500 shares of Euron Ltd. at a cost of €30 per share. She acquired
the Euros to make this purchase at €1.00 = $1.46.
In January 2020, she sells the Euron Ltd. shares for €33.50 per share. The Euros resulting from
this sale are left in her Euro trading account that is maintained with her Canadian broker.

In November 2020, she converts her €117,250 [(3,500)(€33.50)] balance into Canadian dollars,
with the resulting balance being transferred to her Canadian dollar brokerage account. She
closes her brokerage account and withdraws all the funds in December 2020.
Assume relevant exchange rates between the Euro and the Canadian dollar are as follows:
July 2018 €1.00 = $1.46
January 2020 €1.00 = $1.49
November 2020 €1.00 = $1.52
December 2020 €1.00 = $1.60
Required: Calculate the minimum amount that will have to be included in Ms. Laval’s Net
Income For Tax Purposes for 2020 as a result of these transactions.

(Changes In Use - Depreciable Property)
On January 1, 2018, Ms. Laci Detweiler opens a consulting business. As a headquarters for this
new business, she acquires a property for $645,000, of which $120,000 is the estimated value
of the land. While her business occupies all of this property, it is not a new building and, as a
consequence, it does not qualify for the 6 percent enhanced CCA rate on buildings used for
non-residential purposes.
Laci has a large investment portfolio that generates more than $200,000 in income and capital
gains each year. She lives in a large home on the outskirts of town.
Since in its first year of operation, the business was not as successful as Laci had hoped, on
January 1, 2019, she converts 25 percent of the floor space into an apartment for her own use.
She plans to spend some nights there during the work week to save having to fight the traffic.
As the neighbourhood in which the building is located has earned a reputation as a drug dealer
hangout, the estimated fair market value of the property by this date has fallen to $560,000, with
$100,000 of this total being allocated to the land on which the building is situated.
Near the end of 2019, a new upscale residential/retail complex opens near her building, result-
ing in both an increase in the number of clients for her business, as well as an increase in the
fair market value of her property. Based on this, on January 1, 2020, Laci converts her apartment
back to business usage, with her consulting business occupying the entire space during the year
ending December 31, 2020. At the time of the conversion, the fair market value of the property is
$690,000, with $130,000 of this value being allocated to the land on which the building is situated.
Required: Determine the maximum CCA that can be deducted by Ms. Detweiler in 2018,
2019, and 2020 and the January 1, 2021, UCC of the building. In addition, indicate any other tax
consequences that will result from the changes in use of this property.

(Changes In Use - Depreciable Property)
On January 1, 2018, Ms. Laura Darn purchases a real property for $725,000, of which $225,000
reflects the estimated value of the land on which the building is situated, and $500,000 is the
estimated value of the building.
Of the floor space in the building, 80 percent will be used to operate her mail order food supple-
ments business, with the remaining 20 percent being used as her residence.

During 2018, Ms. Darn enters into a relationship with Mr. Lance Buffer, her personal fitness
trainer. Their relationship develops quickly and Mr. Buffer moves in with Ms. Darn on January 1,
2019. Because this requires additional space for Mr. Buffer’s considerable wardrobe, part of the
space used for her mail order business is converted to residential space. Specifically, 20 percent
of the total space is converted to residential use, reducing the space used for her business to
60 percent of the total. At the time of this conversion, the total market value of the property
has increased to $815,000, with $230,000 the estimated value of the land, and the remaining
$585,000 allocated to the building.
In November 2019, Mr. Buffer begins to have an increasingly large number of late night appoint-
ments for his services. Trying to ignore her suspicions, Ms. Darn spends her nights promoting
her business on social media, and her business experiences considerable growth. A trusted
friend finally informs Ms. Darn that most of Mr. Buffer’s late night appointments are with attrac-
tive young females and, while he is providing some services, they are not related to personal
fitness (at least not directly).
Furious, Ms. Darn throws Mr. Buffer out. Because of the tainted memories associated with
him, she feels she cannot continue living in the same residence. Since her business is being
constrained due to lack of space, on January 1, 2020, she moves out of the residential part of
the building and converts the entire space to business usage. At this time, the fair market value
of the building has increased to $875,000, with $245,000 of this total reflecting the value of the
land, and the remaining $630,000 reflecting the value of the building.
Required: Determine the maximum CCA that can be deducted by Ms. Darn in 2018, 2019,
and 2020. In addition, ignoring the principal residence gain deduction, indicate any other tax
consequences that will result from the changes in use of this property.

(Deemed Dispositions - Departure From Canada)
For all of his adult life, Mr. Lange has been a resident of Canada. However, in recent years, the
severity of the climate has begun to have an adverse influence on his health. As a consequence,
on January 1 of the current year, he is planning to move to Sarasota, Florida. On this date, he
owns the following assets:
Adjusted Fair Market
Cost Base Value
Vacant Land $15,000 $ 46,000
Automobile 31,000 18,000
Coin Collection 5,000 11,000
Common Shares In Enbridge Inc. (a public company) 24,000 38,000
Common Shares In BCE Inc. (a public company) 42,000 35,000
Preferred Shares In Royal Bank (a public company) 15,000 23,000
Common Shares In Nal Enterprises Ltd.
(a Canadian controlled private corporation) 26,000 153,000
Mr. Lange has come to you for advice just prior to moving to Florida.
Required: Determine the amount of the taxable capital gain or allowable capital loss that Mr.
Lange will report in his Canadian income tax return for the current year as a result of his departure
from Canada. Assume that the usual rules apply, with no elections being made by Mr. Lange.


(Deferral On Small Business Investments)
Your very wealthy client, Ms. Nell Tosh, is holding investments in a number of small venture
capital companies. In order to diversify her holdings, she has decided to sell two of her many
investments in 2020 and use the proceeds to invest in companies in different industries.
Her first sale, in January, involves Tech Ltd., a company she acquired four years ago for
$3,500,000. Her common shares are sold for $4,200,000. Of the proceeds, $3,800,000 is
immediately invested in Small Oil Inc. common shares. The remainder of the funds are used
to purchase preferred shares in Small Bank Inc. All three corporations are eligible small busi-
ness corporations.
The second sale, in October, involves Future Inc. common shares and results in proceeds of
$5,600,000. This company is an eligible small business corporation and was acquired six years
ago at a cost of $3,800,000. The proceeds are invested in November in common shares of the
following companies:
Sombra Inc. (An Eligible Small Business Corporation) $2,400,000
Ziff Ltd. (An Eligible Small Business Corporation) 2,800,000
BCE (A Canadian Public Company) 400,000
In December, Ms. Tosh is approached by her brother, Niels, a brilliant biochemist. He is planning
to start a new company which will be an eligible small business corporation. Niels would like her
to invest $1,000,000 in his company’s common shares. The company will sell his revolutionary
new weight loss pill.
At a February 20, 2021, meeting Ms. Tosh informs you that she has not invested in any shares
since November. She would like to minimize her tax liability in any way legally possible.
Required: Determine the tax consequences for Ms. Tosh of the two sales of shares and the
adjusted cost base of each of her new investments assuming she does not invest in any other
eligible small business corporations. What tax advice would you give Ms. Tosh regarding an
investment in her brother’s company?

(Replacement Properties - ITA 13(4) Election On UCC)
Trail Resources Ltd. has a taxation year that ends on December 31. During 2020, its storage
building was destroyed in a flash flood. This building was purchased for $500,000 and, on Janu-
ary 1, 2020, its UCC was $368,000. After negotiations with adjustors from the insurance com-
pany, a settlement of $490,000 was agreed upon and paid during 2020.
A replacement building was contracted for, and started, in September 2020. It was completed
in January 2021 for a cost of $650,000. As the building is used exclusively for non-residential
purposes, it qualifies for the 6 percent CCA rate.
Trail Resources Ltd. does not own any other buildings and always takes maximum CCA. The
appropriate election is made by the company to defer any recapture under ITA 13(4).
Required: Explain how the preceding transactions will affect the balance in the company’s
UCC during the period January 1, 2020, through January 1, 2022.


(Voluntary Dispositions - With ITA 44(6) Election)
The current operations of Morcan Inc. (MI) are located in Toronto. Because of the high cost of
living in this venue, the company is experiencing difficulty in attracting new employees. In order
to correct this situation, the company has decided to move its operations to Tweed, Ontario, a
small community with much lower living costs.
To this end, it sells all of its Toronto assets during December 2020. Details of these transactions
are as follows:
Land And Building The company’s building and the land on which it is situated is sold for
a total of $3,400,000, of which $2,300,000 can be allocated to the building and $1,100,000
can be allocated to the land. The land was acquired many years ago at a cost of $350,000.
After acquiring the land, the building was constructed at a cost of $2,100,000. On January
1, 2020, the UCC of the building was $850,000. The company has no other Class 1 assets.
Equipment The equipment, all of which falls into Class 8, was acquired at a cost of
$450,000. On January 1, 2020, the UCC for Class 8 is $165,000. The equipment is sold
for $320,000.
In early 2021, the company acquires a replacement building in Tweed for $3,100,000. Of this
total, it is estimated that $2,500,000 can be allocated to the building, with $600,000 allocated
to the land. As it is not a new building, it does not qualify for the enhanced CCA rate for Class 1.
New equipment is acquired for the use in the building at a cost of $520,000. All of this equip-
ment is allocated to Class 8.
The company would like to minimize any capital gains or recapture resulting from the sale of the
Toronto property. The company’s tax year ends on December 31, 2020, and it does not own any
buildings or equipment on this date.
Required:
A. For the disposition of each property, indicate the tax effects that would be included in the com-
pany’s 2020 tax return.
B. Indicate how these tax effects could be altered in an amended 2020 return by using the elections
available under ITA 44(1) (to defer capital gains) and ITA 13(4) (to defer recapture), but without the
use of the election under ITA 44(6) (to reallocate the proceeds of disposition). Also indicate the
adjusted cost base and, where appropriate, the UCC of the replacement properties, subsequent
to the application of the ITA 44(1) and ITA 13(4) elections.
C. Indicate the maximum amount of any reduction in income in the amended 2020 Net Income For
Tax Purposes that could result from the use of the ITA 44(6) election and calculate the UCC bal-
ance that would result from electing to use this amount. Should the company make the election?
Explain your conclusion.

(Involuntary Dispositions - With ITA 44(6) Election)
On January 1, 2020, a fire completely destroys Fraser Industries Ltd.’s Edmonton office building
and all of its contents. An immediate settlement is negotiated with the company’s fire and casu-
alty insurer. The insurer agrees to pay $4,800,000 for the building and an additional $1,256,000
for the contents of the building. These amounts represent the estimated fair market values of
the destroyed assets, and a cheque is received for these amounts on May 15, 2020.

As the city has been acquiring adjacent land for the development of a park, the company is noti-
fied on January 15, 2020, that the land on which the building was located will be expropriated in
order to expand the park area. The expropriation takes place on April 30, 2020, and Fraser Indus-
tries Ltd. receives $723,000, which is the estimated fair market value of the land.
Other information on the Edmonton property is as follows:
Land The land was acquired at a cost of $256,000.
Building The building was constructed for a total cost of $3,700,000. It is the only
building owned by Fraser Industries Ltd. and on January 1, 2020, the UCC in Class 1
was $1,856,000.
Building Contents The contents of the building consisted entirely of Class 8 assets.
These assets had a cost of $972,000 and the UCC of Class 8 was $72,000 on January 1,
2020. Fraser Industries Ltd. does not own any other Class 8 assets.
In replacing the destroyed property, the company decides to relocate to an area that has lower
land costs. As a consequence, a replacement property is found in Hinton at a cost of $6,200,000.
It is estimated that the fair market value of the land on which the building is located is $500,000.
The remaining $5,700,000 is allocated to the building. As the building is not new, it does not
qualify for the 6 percent CCA rate.
The acquisition closes on November 1, 2021 and, during the following month, contents are
acquired at a cost of $1,233,000. All of the contents are Class 8 assets.
Fraser Industries has a December 31 year end.
Required:
A. For the disposition of each property, indicate the tax effects that would be included in the 2020 tax
return of Fraser Industries Ltd.
B. Indicate how the results in Part A could be altered through the application of ITA 44(1) (to defer
capital gains) and ITA 13(4) (to defer recapture) in an amended 2020 return. Do not consider the
use of the election under ITA 44(6) (to reallocate the proceeds of disposition).
C. Determine the adjusted cost base and, where appropriate, the UCC of the replacement proper-
ties, subsequent to the application of the ITA 44(1) and ITA 13(4) elections.
D. Indicate the maximum amount of any reduction in income in the amended 2020 Net Income For
Tax Purposes that could result from the use of the ITA 44(6) election and determine the adjusted
cost base and, where appropriate, the UCC of the replacement properties, that would result from
electing to use this amount. Should the company make the election? Explain your conclusion.

Family Information
Mr. Paul Klee is 39 year of age and lives with his spouse, Virginia Klee. They have two children,
May who is 9 years old and Max who is 12 years old. May has been blind since birth. During
2020, Max has income of $8,200.
Virginia is 38 years and until recently was employed by a large public company. However, in Sep-
tember 2019 she commenced full time studies at her local university. During 2020, she was in
full time attendance for nine months. Her tuition fees were $9,350. She had 2020 income from
various part time sources of $8,400.

During 2020, the family incurs medical expenses as follows:

Paul $ 1,100
Virginia 1,750
May (No Attendant Care Costs) 13,300
Max 650
Total $16,800
Employment Information
Paul is employed as a salesperson by a Canadian public company. His annual salary is $85,000
and, in addition, he earns commissions of $62,500. The following amounts are withheld by his
employer during 2020:
EI 856
CPP 2,898
Professional Association Dues 1,500
Annual United Way Donations 1,200
Paul’s employer makes a matching contribution to his RPP of $4,100.
Paul’s employer requires that he maintain an office in his home and has provided him with the
requisite Form T2200. This office occupies 20 percent of the total floor space in his home. His
home operating costs for 2020 are as follows:
Maintenance And Utilities $3,400
Insurance 850
Paul’s employer provides a $2,500 per month allowance to cover all of his employment-related
expenses, including an automobile that he owns personally. The automobile was acquired in
2019 at a cost of $45,000. In his 2019 tax return he claimed CCA based on the automobile being
used 55 percent for employment-related activities. For 2020, the usage increased to 80 percent.
Paul’s employment-related expenses for 2020 are as follows:
Automobile Operating Expenses $ 6,100
Hotels 11,500
Airline And Other Transportation 9,200
Client Meals And Entertainment 10,400
Two years ago, Paul’s employer granted him options to buy 1,500 shares of the company stock
at $15 per share. At that time, the shares were trading at $12 per share. In February 2020, when
the shares are trading at $19 per share, Paul exercises all of these options. In November 2020,
he sells all of these securities for $22 per share.
Other Information
1. Paul owned two very large oil paintings, each of which cost $10,000. Since he renovated
his home and added many more windows, he no longer had the wall space to hang these
paintings. During 2020, he sells one painting for $15,000 and the other painting for $4,000.
2. Paul inherited a tract of land from his father. Paul’s adjusted cost base for it was $100,000. In
July 2020, he sells the land to help finance his home renovations. The sale price is $350,000
and the terms of the sale require a 2020 payment of $100,000, with the balance being paid
in annual instalments of $50,000 in each of the years 2021 through 2025. Paul would like to
use a capital gains reserve to defer as much of this gain as possible.
3. During 2020, Paul received non-eligible dividends of $5,400.

4. Since 2015, Paul and his family have owned a cottage on a nearby lake. It had cost $250,000,
including an estimated value for the land of $75,000. As their use of this property has
declined over the years, they have decided to convert the cottage to a rental property. At
the time of the change, the property was appraised at $375,000, including $100,000 for the
land. During 2020, net rental income before the deduction of CCA equals $14,000. Since his
city home has had a very substantial increase in value, Paul does not intend to designate the
cottage as his principal residence for any of the years of ownership.
Required: Calculate Mr. Klee’s minimum 2020 Net Income For Tax Purposes, his 2020
minimum Taxable Income, and his minimum 2020 federal Tax Payable. Ignore provincial income
taxes, any instalments he may have paid during the year, any income tax withholdings that
would be made by his employer, and GST/HST/PST considerations.

Employment Information
Mr. Lorenzo Desoto is 39 years old and is employed by a large public corporation with a Decem-
ber 31 year end. In addition to his 2020 salary of $136,000, he earns commissions during the year
of $43,000. Because of his excellent performance, he has been awarded a bonus of $22,000.
One-half of this amount is payable in December 2020, with the balance being paid on July 15,
2021.
His employer withholds the following amounts from his 2020 income:
EI 856
CPP 2,898
Professional Association Dues 1,500
Annual United Way Contributions 2,400
Lorenzo’s employer makes a matching contribution to his RPP of $2,700.
Lorenzo’s employer provides an allowance of $2,500 per month to cover all of his employment-
related expenses, including the use of his personally owned automobile. This automobile was
acquired in 2019 at a cost of $46,500. In that year, he claimed CCA based on the car being used
60 percent for employment-related activities. In 2020, his employment-related usage increases
to 80 percent.
For 2020, Lorenzo’s employment-related expenses are as follows:
Automobile Operating Expenses $6,300
Hotels 9,700
Airline And Other Transportation 5,400
Client Meals And Entertainment 9,300
Lorenzo’s employer requires him to maintain an office in his home and has provided him with
a signed Form T2200. The office occupies 12 percent of the floor space in his home. The 2020
costs of operating this property are as follows:
Mortgage Interest $7,200
Insurance 1,250
Maintenance And Utilities 1,300

Several years ago, Lorenzo’s employer granted him options to buy 500 shares of the company’s
stock at a price of $92 per share. This was the market value of the shares at the time the options
were granted. In January 2020, when the shares are trading at $108 per share, Lorenzo exer-
cises all of the options. In December 2020, the 500 shares are sold for $115 per share.
Family Information
Lorenzo is married to Maria Desoto. She is 37 years old and has 2020 income of $6,300. Now
that her children are in their teens, Maria attends university on a full time basis during eight
months of the year. Her tuition for 2020 was $9,300.
The Desotos have two children, both born on April 1. Their son, Gianni, is 16 and has Net Income
For Tax Purposes of $6,200, largely from part time summer jobs. Their daughter, Anita, is 14
and is sufficiently disabled that she qualifies for the disability tax credit. Anita has no 2020 Net
Income For Tax Purposes.
The family’s 2020 medical expenses are as follows:
Lorenzo $ 1,350
Maria 3,425
Gianni 2,600
Anita (No Attendant Care Costs) 10,250
Total $17,625
Other Information
1. Lorenzo owns a glass sculpture with an adjusted cost base of $800. During 2020, he sells
this sculpture for $39,000.
2. Lorenzo owns a cottage on a local lake. It had cost $105,000, including an estimated value
for the land of $42,000. While the family has made good use of the property, at the begin-
ning of 2020 he decides to convert the cottage to a rental property. It is estimated that, at
this time, the cottage is worth $350,000, with $100,000 of this amount attributable to the
land. During 2020, net rental income before the deduction of CCA equals $5,740. Lorenzo
does not intend to designate the cottage as his principal residence in any of his years of
ownership.
3. Lorenzo owns 500 units of the Real Property Income Trust. The adjusted cost base of
these units on January 1, 2020, is $56.00 per unit. During 2020, the trust distributions total
$2.40 per unit, with all of this amount being property income. The entire distribution was
reinvested in additional units on the basis of $58.50 per unit. During December 2020, all of
these trust units were sold for $60.25 per unit.
4. For several years, Lorenzo has owned a tract of land with an adjusted cost base of $78,000.
His intent was to eventually construct a rental property on this site. However, with the con-
version of the cottage to a rental property, he decides to reduce his real estate holdings.
To this end, the land is sold for $180,000. The buyer provides an immediate payment of
$54,000, with the balance payable in annual instalments of $18,000 beginning in 2021.
5. During 2020, Lorenzo received eligible dividends of $4,200.
Required: Calculate Mr. Desoto’s minimum 2020 Net Income For Tax Purposes, his 2020
minimum Taxable Income, and his minimum 2020 federal Tax Payable. Ignore provincial income
taxes, any instalments he may have paid during the year, any income tax withholdings that
would be made by his employer, and GST/HST/PST considerations.

SSS Problem Eight–2


(Identical Properties)
Over the last 10 years, Ms. Julie Ho has engaged in the following transactions in the shares of
Alcor Ltd.:
Type Of Number Cost (Proceeds)
Date Transaction Of Shares Per Share
May 2010 Purchase 200 $10.00
June 2011 Purchase 150 14.75
April 2014 Sale ( 75) ( 16.25)
July 2016 Purchase 125 13.50
October 2018 Purchase 180 12.75
July 2020 Sale (200) ( 14.00)
Required: Determine the amount of any taxable capital gain or allowable capital loss resulting
from the 2020 sale of Alcor Ltd. shares.

(Warranties, Bad Debts, And Reserves)
For a number of years, Ms. Marcia Hanson has owned a tract of undeveloped land near Regina.
Ms. Hanson’s adjusted cost base for the land is $1,350,000.
At the beginning of 2020, a developer offers $4,200,000 for the land and Ms. Hanson accepts the
offer.
As the developer will need a large portion of her resources to undertake the development, Ms.
Hanson agrees to accept a $1,200,000 down payment, with subsequent annual payments of
$1,000,000 on December 31 of each of the years 2021, 2022, and 2023. Interest, calculated as
5 percent of the beginning of the year balance, is also payable on December 31 of each of these
years. Ms. Hanson intends to use capital gains reserves to defer taxes to the greatest extent
possible.
It is the intent of the developer to divide the property into 105 individual lots. There is, however,
considerable risk in the project as the lots are over 20 kilometres from downtown Regina. Given
this, Ms. Hanson agrees to reimburse the developer an amount of $10,000 for each lot that is not
sold by December 1, 2022.
By December 1, 2022, only 65 of the lots have been sold, a result that requires Ms. Hanson to pay
the developer $400,000 [($10,000)(40 Lots)] on December 20, 2022.
In 2021 and 2022, the developer makes the required interest and principal payments.
While the developer continues her efforts to market the lots through the first part of 2023, she is not
successful and, on June 1, 2023, she declares bankruptcy. As the developer appears to have left
the country, Ms. Hanson does not anticipate being able to collect any of the remaining balance on
the loan or the final interest payment.
Required: Calculate the tax effects of the transactions that took place during 2020 through 2023
on Ms. Hanson’s Net Income For Tax Purposes.


(Principal Residence Designation)
In early 2020, Miss Mary Stern advises you that it is her intention to sell both her Ottawa resi-
dence and her condominium at Mt. Tremblant. She acquired both of these properties in 2006 and
has spent at least a part of each subsequent year in residence at each property. The cost of the
Ottawa house was $173,000, while the Mt. Tremblant condominium was $131,000. She provides
you with the following additional information:
City Home Condo
Estimated Selling Price $325,000 $304,000
Anticipated Selling Costs 13,500 12,240
She has asked you to determine the minimum taxable capital gain that would result from the sale of
the two properties during 2020.
Required: Describe how the residences should be designated to accomplish Miss Stern’s goal. In
addition, calculate the amount of the taxable capital gain that would arise under the designation that
you have recommended.

(Personal Use Property)
During the current year, Mrs. Irene Vargo sold a number of personal assets, all of which she had
acquired in the last five years. The relevant information on these sales is as follows:
Cost Proceeds Selling Costs

Automobile $25,000 $27,000 $150
Coin Collection 1,600 1,300 50
Rare Manuscript 1,700 800 30
Boat 4,500 3,500 175
Painting 700 1,100 50
Antique Clock 800 1,700 50
Required: Determine the net taxable capital gain that Mrs. Vargo will include in her income for
the current year. Indicate any carry over amounts that can be used in previous or subsequent
years.

(Capital Gains On Foreign Securities)
Ms. Petra Nobel is a Canadian resident who, on occasion, purchases securities for her brokerage
account in the Netherlands. In September 2017, she acquired a large block of shares of
Gardengrow for 53,000 euros (€, hereafter). She purchased these shares with euros acquired at a
rate of €1.00 = $1.38.
In March 2020, the Gardengrow shares were sold for €97,000, with the funds remaining in her euro
bank account until September. In September, the €97,000 was converted into Canadian dollars and
transferred to her Canadian bank account.
Assume relevant exchange rates between the euro and Canadian dollar are as follows:
September 2017 €1.00 = $1.38

March 2020 €1.00 = $1.48
September 2020 €1.00 = $1.52

Required: Calculate the minimum amount that will have to be included in Ms. Nobel’s Net
Income For Tax Purposes for 2020 as a result of these transactions.

(Change In Use And Rental Income With CCA)
Ms. Marnie Houston acquired a residence 10 years ago for a total cost of $235,000. At the time of
purchase, it was estimated that the value of the land on which the house was situated was
$85,000. Until January 1, 2020, Marnie and her two children occupied all of the house.
Early in 2020, Marnie’s two children moved out, leaving a significant portion of the house unused.
Because of this, Marnie decides to move to a small apartment and retain the former residence as a
rental property. On April 1, 2020, a tenant moved into the house. Marnie does not make an election
under ITA 45(2). The ITA 45(2) election deems that the change in use has not occurred.
Marnie had the house appraised on April 1, 2020. The appraiser indicated that the total value of the
property was $392,000, with $112,000 of this amount reflecting the value of the land on which the
house was situated.
For the period April 1, 2020, through December 31, 2020, Marnie’s expenses on the property were
as follows:
Property Taxes $4,600

Insurance 1,100
Maintenance And Operating Costs 1,850
The monthly rent was set at $1,900 per month, payable at the beginning of each month. The tenant
paid all amounts required during 2020.
Required: For the year ending December 31, 2020, determine Ms. Houston’s minimum net rental
income (loss). Your calculations should include the maximum available CCA, without regard to
whether the full amount can be deducted. Indicate any other tax consequences that will result from
the change in use.

(Deferral On Small Business Investments)
The following two independent Cases involve dispositions of eligible small business corporation
shares, with the proceeds being invested in replacement shares. In both Cases, the original shares
have been held for more than a year.
Case A On June 30, 2020, Jonathan sells his common shares in Corporation A, which is an
eligible small business corporation. His proceeds of disposition are $585,000 and his adjusted
cost base is $371,000. On September 13, 2020, Jonathan invests $472,000 in common shares
of Corporation B, which is a new eligible small business corporation.
Case B On December 12, 2019, Lorraine disposes of common shares in Corporation C,

which is an eligible small business corporation. Her proceeds of disposition are $1,253,000 and
her adjusted cost base is $722,000. On February 1, 2020, Lorraine acquires common shares in
Corporation D, which is also an eligible small business corporation, at a cost of $1,346,000.
Required: For both Cases, determine the maximum permitted capital gains deferral, as well as
the adjusted cost base of the replacement shares.


(Replacement Properties - ITA 13(4) Election On UCC)
Farnham Inc. has a taxation year that ends on December 31. The company carries on its oper-
ations in a single building. This building has a capital cost of $850,000 and, on January 1, 2020, its
UCC was $113,000. The building’s furniture and fixtures (all Class 8) have a capital cost of
$220,000 and a January 1, 2020, UCC of $152,000. The company has no other Class 8 assets.
On February 12, 2020, the building and its contents were completely destroyed in a fire. The
building was insured for its capital cost of $850,000 and the furniture and fixtures were insured for
$180,000. As the fire completely destroyed all of these assets, on June 18, 2020, the company
received a payment from its insurer for $1,030,000 ($850,000 + $180,000).
In 2021, Farnham Inc. acquires a replacement building for $925,000. As this replacement building
is not a new building, it does not qualify for the 6 percent CCA rate.
During the following month, furniture and fixtures are installed in this new building at a cost of
$235,000.
Required: Ignore land values in calculating your solution:

A. Indicate the 2020 tax consequences that would result from the destruction of the building and
its contents.
B. Indicate the maximum amendments that could be made to the results described in Part A by
filing an election under ITA 13(4). Assuming that these amendments have been made,
determine the maximum CCA on the new building and the new Class 8 assets for the year
ending December 31, 2021. In addition, calculate the January 1, 2022, UCC balance for each
class.
C. Assume that, instead of having the building and contents destroyed by fire, the company had
sold the building and its contents for $1,030,000 in 2020 in order to voluntarily move to the new
location in 2021. How would the results in Part B differ?
D. Assume that the replacement building for the burned building had cost $700,000 instead of
$925,000. How would the results in Part B differ?

(Voluntary Dispositions - With ITA 44(6) Election)
Mr. Larson, the president of Larson Distributing Inc., was offered $1,875,000 for the land, building,
and equipment used by his business at its suburban Toronto location. As he believed that his
business could be operated at a less valuable rural location, he accepts the offer and sells the
business property on October 15, 2020. The details relating to this sale are as follows:
Land The land was acquired at a cost of $137,000. At the time of the sale, it was
estimated that the fair market value of the land was $772,000.
Building The building was constructed at a total cost of $605,000. At the time of the sale,
its UCC was $342,000, while its estimated fair market value was $989,000.
Equipment The equipment had an original cost of $452,000. On October 15, 2020, its
UCC was $127,000 and its estimated fair market value was $114,000.
In 2021, Mr. Larson acquires a replacement property in Barry’s Bay at a total cost of $1,500,000.
This cost is allocated as follows:

Land $ 253,000
Building 1,042,000
Equipment 205,000
Total $1,500,000
As the building is not a new structure, it is not eligible for the 6 percent CCA rate for Class 1 assets.
The company would like to defer any capital gains or recapture resulting from the sale of the
Toronto property. The company’s tax year ends on December 31, 2020, and it does not own any
buildings or equipment on this date.
Required:
A. For the disposition of each property, indicate the tax effects that would be included in the
company’s 2020 tax return. In addition, indicate how these tax effects could be altered in an
amended 2020 return by using the elections available under ITA 44(1) (to defer capital gains)
and ITA 13(4) (to defer recapture), but without the use of the election under ITA 44(6) (to
reallocate the proceeds of disposition). Also indicate the adjusted cost base and, where
appropriate, the UCC of the replacement properties, subsequent to the application of the ITA
44(1) and ITA 13(4) elections.
B. Indicate the maximum amount of any reduction in income in the amended 2020 Net Income For
Tax Purposes that could result from the use of the ITA 44(6) election and calculate the UCC
balance that would result from electing to use this amount.

Solution to SSS Problem Eight–2

The average cost of the shares sold in 2020 is calculated as follows:
Shares Acquired Cost Average

Acquisition (Sale) Date (Sold) Per Share Total Cost Cost
May 2010 200 $10.00 $2,000.00
June 2011 150 14.75 2,212.50
350 $4,212.50 $12.04
April 2014 ( 75) $12.04 ( 903.00)
275 $3,309.50
July 2016 125 $13.50 1,687.50
October 2018 180 12.75 2,295.00
Totals 580 $7,292.00 $12.57
Given the preceding, the July 2020 sale would result in a taxable capital gain calculated as follows:
Proceeds Of Disposition [(200)($14.00)] $2,800.00
Adjusted Cost Base [(200)($12.57)] ( 2,514.00)
Capital Gain $ 286.00
Inclusion Rate 1/2
Taxable Capital Gain $ 143.00

2020 Results
The only tax consequence in this year is the capital gain that occurs on the sale. The gain, along
with the maximum deductible reserve, would be calculated as follows:
Proceeds Of Disposition $4,200,000
Adjusted Cost Base ( 1,350,000)
Reserve - Lesser Of:
• [($2,850,000)($3,000,000 ÷ $4,200,000)] = $2,035,714
• [($2,850,000)(20%)(4 - 0)] = $2,280,000 ( 2,035,714)
Inclusion Rate 1/2
As no provision can be made for the estimated cost of the warranty, the total Net Income For Tax
Purposes inclusion for 2020 would be $407,143.
2021 Results
During this year, Ms. Hanson will include $150,000 [(5%)($3,000,000)] of interest in her Net Income
For Tax Purposes.

In addition, Ms. Hanson will include the 2020 reserve in income and deduct a new reserve for 2021.
The calculations are as follows:
2020 Reserve Added To Income $2,035,714
2021 Reserve - Lesser Of:
• [($2,850,000)($2,000,000 ÷ $4,200,000)] = $1,357,143
• [($2,850,000)(20%)(4 - 1)] = $1,710,000 ( 1,357,143)
Inclusion Rate 1/2
The total Net Income For Tax Purposes inclusion for 2021 would be $489,286 ($150,000 +
$339,286).
2022 Results
During this year, Ms. Hanson will include $100,000 [(5%)($2,000,000)] of interest in her Net Income
For Tax Purposes.
Ms. Hanson will include the 2021 reserve in income and deduct a new reserve for 2022. She will
also deduct the $400,000 required payment to the developer. As this payment is required by a
warranty on a capital asset, this will be a capital loss. The calculations are as follows:
2021 Reserve Added To Income $1,357,143
2022 Reserve - Lesser Of:
• [($2,850,000)($1,000,000 ÷ $4,200,000)] = $678,571
• [($2,850,000)(20%)(4 - 2)] = $1,140,000 ( 678,571)
Capital Loss On Warranty ( 400,000)
Net Capital Gain $ 278,572
Inclusion Rate 1/2
Net Taxable Capital Gain $ 139,286
The total Net Income For Tax Purposes inclusion for 2022 would be $239,286 ($100,000 +
$139,286).
2023 Results
With the bankruptcy of the developer, no interest will be collected in 2023 and the balance of the
loan must be written off as a bad debt, resulting in a capital loss of $1,000,000.
Ms. Hanson will include the 2022 reserve of $678,571 in income. Since the loan was to be paid off
in 2023, there would have been no new reserve to be deducted, regardless of the bankruptcy.
The net effect of these items is an allowable capital loss of $160,715 [(1/2)($678,571 -
$1,000,000)]. Note that this loss can only be deducted in 2023 to the extent of taxable capital gains
in that year. However, it can be carried back to be applied to the capital gains that were recognized
in previous years.
Summary (Not Required)

The results can be summarized as follows:

Taxable Gain
Year Interest (Allowable Loss)
2020 Nil $407,143
2021 $150,000 339,286
2022 100,000 139,286
2023 Nil ( 160,715)
Totals $250,000 $725,000
This result can be verified as follows:

Warranty Payment ( 400,000)
Bad Debt Loss ( 1,000,000)
Inclusion Rate 1/2
An alternative verification calculation would be as follows:

Down Payment $1,200,000
Payments Received [(2)($1,000,000)] 2,000,000
Warranty Cost ( 400,000)
Total Proceeds Of Disposition $2,800,000
Adjusted Cost Base ( 1,350,000)
Inclusion Rate 1/2

During the period 2006 through 2020 (15 years), the condo experienced the larger capital gain, as
shown in the following table. To minimize the total capital gain, it should be designated the principal
residence for 14 years. This will completely eliminate the capital gain as the exemption formula
adds an additional year.
This will leave one year for the city home to be designated her principal residence.
The minimum taxable capital gain for 2020 would be calculated as follows:
City Home Condo
Estimated Proceeds Of Disposition $325,000 $304,000
Adjusted Cost Base ( 173,000) ( 131,000)
Anticipated Selling Costs ( 13,500) ( 12,240)
Total Gain $138,500 $160,760
Exemption:
City Home [$138,500][(1 + 1) ÷ 15] ( 18,467)
Condo [$160,760][(14 + 1) ÷ 15] ( 160,760)
Capital Gain $120,033 Nil
Inclusion Rate 1/2 N/A
Taxable Capital Gain $ 60,017 Nil
Note that, when both properties are owned for the same length of time (15 years in this example),
there is no need to calculate an annual gain for each property.


Classification Of Property
All of the items sold are personal use property. However, if they can be classified as “listed
personal property”, their tax treatment will be different. Under ITA 54, listed personal property
consists of the following items.
(i) print, etching, drawing, painting, sculpture, or other similar work of art,
(ii) jewelry,
(iii) rare folio, rare manuscript, or rare book,
(iv) stamp, or
(v) coin.
Personal Use Property

The automobile, boat, and antique clock would be classified as personal use property. As a
consequence, the loss on the boat cannot be recognized. However, capital gains on the other items
would be taxable and are calculated, taking into consideration the $1,000 floor rule, as follows:
Auto Clock
Proceeds Of Disposition $27,000 $1,700
ACB - Auto ( 25,000)
ACB - Clock, Greater Of
• $800
• $1,000 Floor ( 1,000)
Selling Costs ( 150) ( 50)
Capital Gain $ 1,850 $ 650
As losses on personal use property are not deductible under any circumstances, no consideration
is given to the sale of the boat.
Listed Personal Property

The coin collection, rare manuscript, and painting would be classified as listed personal property. If
a loss occurs on property in this category, it can be deducted against capital gains on property in
this category. Given this, the relevant calculations are as follows:
Coins Manuscript Painting

POD - Manuscript, Greater Of:
• $800
• $1,000 Floor $1,000
ACB - Painting, Greater Of:
• $700
• $1,000 Floor ( 1,000)
Selling Costs ( 50) ( 30) ( 50)
Capital Gain (Loss) ($ 350) ($ 730) $ 50
Summary
The total addition to Net Income For Tax Purposes would be as follows:
Personal Use Property
Gain On Automobile $1,850
Gain On Clock 650
Loss On Boat N/A $2,500

Listed Personal Property

Gain On Painting $ 50
Loss On Listed Personal Property (Note) ( 50) Nil
Net Capital Gains $2,500
Inclusion Rate 1/2
Addition To Net Income For Tax Purposes $1,250
Note The losses on listed personal property total $1,080 ($350 + $730). However,
they can only be deducted to the extent of the gain on listed personal property of $50.
The remaining loss of $1,030 ($1,080 - $50) can be carried over to other years. As is
discussed in Chapter 11, such losses can be carried back three years and forward for
seven years.

The taxable capital gain on the sale of securities and the conversion to Canadian dollars would be
Capital Gain On Sale Of Securities

Proceeds Of Disposition (€97,000 @ $1.48) $143,560
Adjusted Cost Base (€53,000 @ $1.38) ( 73,140) $70,420
Net Foreign Exchange Gain

Converted Dollars - September (€97,000 @ $1.52) $147,440
Proceeds Of Disposition - March (€97,000 @ $1.48) ( 143,560)
Capital Gain On Foreign Exchange $ 3,880
ITA 39(1.1) Deduction ( 200) 3,680
Total Capital Gains $74,100
Inclusion Rate 1/2
There is a foreign exchange gain under ITA 39(1.1), resulting from the increase in the value of the
euro between March and September. The amount would be $3,880. As Ms. Nobel is an individual,
she is eligible to deduct the first $200 of foreign exchange gains under ITA 39(1.1).
As the securities would be considered capital assets, this net foreign exchange gain of $3,680
would be a capital gain.
Ms. Nobel’s income inclusion would be $37,050.


Minimum Net Rental Income
The maximum CCA on the property would be calculated as follows:
Cost ($235,000 - $85,000) $150,000
Bump Up {[1/2][($392,000 - $112,000) - ($235,000 - $85,000)]} 65,000
Capital Cost For CCA Purposes Only $215,000
Half-Year Adjustment (Note 1) ( 107,500)
CCA Base $107,500
Rate For Class 1 4%
Maximum CCA $ 4,300
Note 1 As the property was owned by Marnie prior to the deemed disposition, the AccII
provisions are not applicable and the half-year rule must be applied.
Minimum net rental income would be calculated as follows:

Rent [($1,900)(9)] $17,100
Less:
Property Taxes ($4,600)
Insurance ( 1,100)
Maintenance And Operating Costs ( 1,850)
Mortgage Interest ( 8,200) ( 15,750)
Income Before CCA $ 1,350
CCA (Note 2) ( 1,350)
Net Rental Income Nil
Note 2 Since the problem requires that the minimum rental income (loss) be calculated,
CCA has been deducted. While maximum CCA would be $4,300, a rental loss cannot be
created through the deduction of CCA. As a consequence, the actual CCA deduction is
limited to $1,350, the amount of net rental income before the deduction of CCA.
For individuals, the calendar year is considered the fiscal year for property income purposes. Given
this, there is no adjustment for a short fiscal period in the year the property is converted to an
income producing asset.
Additional Tax Consequences

As no election was made under ITA 45(2), the usual change in use procedures will be applicable.
This will result in taxable capital gains calculated as follows:
Land Building
Proceeds Of Disposition
Land $112,000
Building ($392,000 - $112,000) $280,000
Adjusted Cost Base/Capital Cost
Land ( 85,000)
Building ($235,000 - $85,000) ( 150,000)
Capital Gains $ 27,000 $ 130,000
Inclusion Rate 1/2 1/2
Taxable Capital Gains $ 13,500 $ 65,000

As it appears that the property was Ms. Houston’s only principal residence during all of the years
that she owned the property, it is likely that this can eliminated through the use of the principal
residence exemption.

In both Cases, since the common shares have been held for more than 185 days, the sales are
qualifying dispositions. In both Cases, the eligible small business corporation common shares were
purchased within 120 days after the end of the year in which the qualifying disposition took place.
As a result, they can be designated as replacement shares.
Case A
The capital gain on the disposition is $214,000 ($585,000 - $371,000). As the cost of the
replacement shares is only $472,000, the permitted deferral would be $172,663 [($472,000 ÷
$585,000)($214,000)].
The adjusted cost base of the replacement shares would be $299,337 ($472,000 - $172,663).
Case B
The capital gain on the disposition is $531,000 ($1,253,000 - $722,000). As the cost of the
replacement shares is greater than the qualifying cost of the proceeds of disposition, the entire
$531,000 capital gain can be deferred.
This would leave the adjusted cost base of the replacement shares at $815,000 ($1,346,000 -
$531,000). Note that the deferral election can be made because the replacement shares were
acquired within 120 days after the end of the year.

Part A
As the insurance proceeds were equal to the capital cost of the building, there is no capital gain on
the building. With respect to the furniture and fixtures, the insurance proceeds were less than the
capital cost of the assets, again resulting in no capital gain. Given this, we can simply deduct the
insurance proceeds from the UCC to arrive at the 2020 figures for recapture.
Furniture
Building And Fixtures
UCC $113,000 $152,000
Insurance Proceeds ( 850,000) ( 180,000)
Recapture Of CCA ($737,000) ($ 28,000)
The total income inclusion for 2020 would be $765,000 ($737,000 + $28,000). The $737,000 and
$28,000 would be added back to the relevant CCA classes, leaving each of them with a January 1,
2021, balance of nil.
Part B
For both types of assets, the replacement cost exceeded the amount of recapture recorded in
2020. Given this, the maximum amendment on the building would be the $737,000 in recapture
that was recorded in 2020. Similarly, the maximum amendment on the furniture and fixtures would
be the $28,000 that was recorded as recapture on that class in 2020.
The maximum 2021 CCA figures and the January 1, 2022, UCC would be based on the capital cost
of the new assets, reduced by the amount of the amended recapture. The AccII provisions would
be applicable to both classes. The relevant calculations would be as follows:

Furniture
Building And Fixtures
UCC - January 1, 2021 Nil Nil
Additions
Building ($925,000 - $737,000) $188,000
Furniture And Fixtures
($235,000 - $28,000) $207,000
AccII Adjustment 94,000 103,500
CCA Base $282,000 $310,500
CCA - Building [($282,000)(4%)] ( 11,280)
CCA - Class 8 [($310,500)(20%)] ( 62,100)
UCC - January 1, 2022 $176,720 $144,900
Part C
The rules for voluntary dispositions differ from those for involuntary dispositions in two ways:
• In the case of voluntary dispositions, in order to elect under ITA 13(4), the replacement must
occur within the first taxation year after the disposition took place. With involuntary dispositions,
the taxpayer has two years to replace the property. As Farnham Inc. replaced both types of
assets in the year following the disposition, this constraint would not alter the Part B results.
• In the case of voluntary distributions, ITA 13(4) is only available on real property. This means
that Farnham Inc. would not be able to make the ITA 13(4) election on the Class 8 assets.
Because of this, there would be no amendment of the $28,000 in 2020 recapture that was
recorded on these assets.
Since there was no amendment of the recapture on the Class 8 assets, the 2021 CCA on these
assets would be $23,500 [($235,000)(1/2)(20%)], rather than the $20,700 that was recorded in Part
B when the ITA 13(4) election was available. This would result in a January 1, 2022, UCC of
$211,500 ($235,000 - $23,500). There would be no change from the Part B results in the CCA or
the UCC of the building.
Part D
If the replacement cost had been $700,000 (less than the 2020 recapture), ITA 13(4) would not be
able to reverse all of the recapture on the building. This is shown in the following calculation.
January 1, 2020, UCC Of Building $113,000
Deduction:
Lesser Of:
• Capital Cost = $850,000 ($850,000)
• Normal Recapture = $737,000
• Replacement Cost = $700,000 700,000 ( 150,000)
Amended 2020 Recapture On Building ($ 37,000)
The amendment of 2020 recapture would be limited to $700,000, leaving a balance of $37,000 in
the amended 2020 return. In addition, it would leave the UCC of the new building at nil ($700,000 -
$700,000). This means that the 2021 CCA on the building would be nil, as would be the January 1,
2022, UCC.

In terms of the economics of these calculations, the company received insurance proceeds of
$850,000, an amount that was $737,000 greater than the $113,000 UCC of the old building. Since
it only reinvested $700,000 of this amount in the new building, the excess $37,000 will remain in
2020 income as recapture.

Part A - Land
In the company’s 2020 tax return a capital gain on the land would be reported as follows:
Capital Gain $635,000
Inclusion Rate 1/2
Taxable Capital Gain - 2020 Tax Return Inclusion $317,500
If the ITA 44(1) election is used in 2021, the amended 2020 capital gain would be $519,000, the
lesser of:
• $635,000 (regular capital gain); and
• $519,000 (the excess of the $772,000 proceeds of disposition for the old land over the
$253,000 cost of the replacement land).
The taxable amount would be $259,500 [(1/2)($519,000)] and this would be included in the revised
2020 Net Income For Tax Purposes. The original gain of $635,000 would be eliminated in the
revised return.
If the ITA 44(1) election is used in 2021, the deemed adjusted cost base of the replacement land
would be calculated as follows:
Actual Cost $253,000
Capital Gain Reversed By Election ($635,000 - $519,000) ( 116,000)
Deemed Adjusted Cost Base Of Replacement Land $137,000
Note that the deemed adjusted cost base of the replacement land has been reduced to the
adjusted cost base of the old land.
Part A - Building
As reported in the company’s 2020 tax return, the capital gain and recapture on the building would
be as follows:
Inclusion Rate 1/2
Taxable Capital Gain - 2020 Tax Return Inclusion $192,000
Opening UCC $342,000

Deduct Disposition - Lesser Of:
• Capital Cost = $605,000 ( 605,000)
UCC Balance = Recapture - 2020 Tax Return ($263,000)

If the ITA 44(1) election is used in 2021, the amended 2020 capital gain would be nil, the lesser of:
• $384,000 (regular capital gain); and
• Nil (reflecting the fact that there was no excess of the $989,000 proceeds of disposition for the
old building over the $1,042,000 cost of the replacement building).
Based on this, the deemed capital cost of the replacement building would be calculated as follows:
Actual Cost $1,042,000
Capital Gain Reversed By Election Under ITA 44(1) ( 384,000)
Deemed Capital Cost Of Replacement Building $ 658,000
This result reflects the capital cost of the old building ($605,000), plus the $53,000 ($1,042,000 -
$989,000) of additional funds required to purchase the new building.
If the ITA 13(4) election is used in 2021, the amended 2020 recapture would be calculated as
follows:
Deduction:
Lesser Of:
• Capital Cost = $605,000 $605,000
• Normal Recapture = $263,000
• Replacement Cost = $1,042,000 ( 263,000) ( 342,000)
Recapture Of 2020 CCA (Amended) Nil
These new nil figures for the capital gain and the recapture on the disposition of the old building will
replace the old figures of $384,000 and $263,000 that were included in the original 2020 return.
If the ITA 44(1) and ITA 13(4) elections are made, the UCC of the replacement building would be
Deemed Capital Cost $658,000
Recapture Reversed By Election Under ITA 13(4) ( 263,000)
UCC - Replacement Building $395,000
Note that the UCC for the new building is equal to the UCC of the old building ($342,000), plus the
additional $53,000 ($1,042,000 - $989,000) in funds required for its acquisition.
Part A - Equipment
As this is a voluntary disposition, the equipment does not qualify as “former business property” and,
as a consequence, neither the ITA 44(1) nor the ITA 13(4) election can be used. However, as there
were no other assets in the class at the end of 2020, there will be a terminal loss of $13,000
($127,000 - $114,000). The new equipment has a capital cost equal to its actual cost of $205,000.
This is also equal to the UCC.
Part B - The Election

The preceding result can be improved by using ITA 44(6) to move some of the proceeds of
disposition on the land to the building. However, this transfer is only useful to the extent of the
$53,000 excess of the $1,042,000 replacement cost of the building over the $989,000 proceeds of
disposition on the old building. The results of this transfer would be as follows:

Land Building
Actual Proceeds Of Disposition $772,000 $ 989,000
Optimum Transfer Land To Building ( 53,000) 53,000
Adjusted Proceeds Of Disposition $719,000 $1,042,000
Part B - Application To Land

If both the ITA 44(1) and the ITA 44(6) elections are used, the capital gain on the land will be the
lesser of:
• $582,000 ($719,000 - $137,000); and
• $466,000 (the excess of the $719,000 adjusted proceeds of disposition for the old land
over the $253,000 cost of the new land).
The adjusted cost base of the replacement land is calculated as follows:
Actual Cost $253,000
Capital Gain Reversed By Elections ($582,000 - $466,000) ( 116,000)
Deemed Adjusted Cost Base Of Replacement Land $137,000
Part B - Application To Building

If both the ITA 44(1) and the ITA 44(6) elections are used, the capital gain on the building will be
nil, calculated as follows:
• $437,000 ($1,042,000 - $605,000); and
• Nil (reflecting the fact that there was no excess of the $1,042,000 proceeds of disposition
for the old building over the $1,042,000 cost of the replacement building).
Based on this, the deemed capital cost and UCC of the replacement property would be calculated
as follows:
Actual Cost $1,042,000
Capital Gain Reversed By Elections ( 437,000)
Deemed Capital Cost $ 605,000
Recapture Reversed By ITA 13(4) ( 263,000)
UCC - Replacement Building $ 342,000
Part B - Comparison
The table that follows compares the results of using only ITA 44(1) and ITA 13(4) with the results
that arise when the ITA 44(6) election is also used.
No ITA 44(6) With ITA 44(6)
Capital Gains
Land $519,000 $466,000
Building Nil Nil
Replacement Property
Adjusted Cost Base Of Land $137,000 $137,000
Capital Cost Of Building 658,000 605,000
UCC 395,000 342,000
Note that this election is not made without a cost. Had the $53,000 been left as a capital gain, tax
would have applied on only one-half of the total. While we have eliminated this $26,500 in income,
we have given up future CCA for the full amount of the $53,000. In other words, we have given up
$53,000 in future deductions in return for eliminating $26,500 of income in 2020.

Self Study Problem Nine - 1

(Moving Expenses)
Ms. Michelle Wong has worked for Famous Food Importers for over 20 years. For 2020, her
salary is $15,000 per month. For this entire period, she has worked in the Montreal office of the
company. However, she is finding Montreal winters to be increasingly less attractive and, as a
consequence, asked to be transferred to the Vancouver office of the company.
As she is considered to be a highly valuable employee, the company agrees to this move.
During September 2020, she flies to Vancouver in order to locate a new residence. While she
is there, she is unable to locate a property at a price that she can afford. After her return to
Montreal, she searches online and finally manages to lease a suitable condominium for
$2,500 per month. The lease is for 12 months, beginning December 1, 2020. The costs associ-
ated with this trip are as follows:
Air Fare - Return $1,125

Rental Car Costs (5 Days) 342
Hotel (5 Nights At $200) 1,000
Food (5 Days - Total) 450
At the beginning of September 2020, she lists her Montreal residence for sale. She had paid
$625,000 for the residence several years ago. However, because a crematorium has begun operat-
ing in the neighborhood, it sells for only $550,000. Costs associated with this sale are as follows:
Real Estate Commissions $27,500

Legal Fees 800
Unpaid Property Taxes To Date Of Sale 1,500
Cost Of Cleaning And Minor Repairs Prior To Sale 3,800
While Michelle will continue to work in Montreal until November 15, the closing on the old
house is on October 20. Because of this, all of her furnishings must be put into storage until they
are shipped on November 20. The storage costs are $2,200. In addition, the moving company
charges $10,200 for the costs of the move, including packing in Montreal and unpacking at the
apartment in Vancouver.
During the period October 20 through November 15, 2020, Michelle resides in a downtown
Montreal hotel.
On November 15, she departs for Vancouver. She drives her own vehicle, arriving in Vancouver
on November 24. The trip is 4,558 kilometres.
As the condominium unit is not available until December 1, she spends seven nights in a
Vancouver hotel.
Her expenses for the period October 20 through December 1 are as follows:
Hotel In Montreal (26 Nights At $350) $9,100

Food In Montreal (26 Days - Total) 2,050
Gas For Trip 685
Lodging For 9 Nights On The Trip* 1,575
Food On The Trip (9 Days - Total) 825
Lodging In Vancouver (7 Nights At $320) 2,240
Food In Vancouver (7 Days - Total) 1,330
* The hotel charges did not exceed $200 for any one night.

Michelle will use the simplified method of determining vehicle and food costs in calculating her
moving expenses. Assume that the relevant flat rate for vehicle expenses is $0.58 for all prov-
inces, and the flat rate for meals is $51 per day.
To assist her with the move, the Vancouver office will do the following:
• They will provide her with a $20,000 allowance to cover her general moving costs.
• They will compensate her, in full, for any loss on the sale of her Montreal residence. The loss
will be determined without consideration of applicable selling costs.
• They will provide a one-time payment of $10,000 to assist her in dealing with the higher
housing costs in Vancouver.
Michelle begins working in Vancouver on December 1. She will take the maximum moving
expense deduction for 2020.
Required: Determine the amount of Michelle’s maximum 2020 deduction for moving expenses
and indicate the amount of any carry forward that is available at the end of the year.

(Child Care Expenses)
Both Mr. Fortin and Mrs. Fortin are employed. During 2020, Mr. Fortin had opened a restaurant
and had business income of $8,000. Mrs. Fortin had employment income of $84,000, mostly
from commission sales during 2020. Since Mrs. Fortin’s work required a good deal of travel
away from home and Mr. Fortin’s new restaurant required him to work long hours, including
many evenings, they had to pay for care of their children. Payments for child care amounted to
$400 per week, for a total of 48 weeks.
Also during the current year, there was a period of six weeks during which Mr. Fortin was hos-
pitalized due to injuries suffered during a game of Ultimate Frisbee. This period was part of the
48 weeks for which child care payments were made.
Required: Determine the maximum amount that can be deducted by Mr. and Mrs. Fortin for
the year ending December 31, 2020, for child care expenses under the following assumptions:
A. They have two children, neither of whom qualify for the disability tax credit. Their ages are 2 and
4 years old.
B. They have three children, none of whom qualify for the disability tax credit. Their ages are 2, 4, and
15 years old.

Maureen Hadley and her common-law partner, Sue Brendal, have three adopted children. At the
end of 2020, their ages are as follows:
• Their daughter Lori is 4 years old.
• Their son Jack is 8 years old and qualifies for the disability tax credit.
• Their son Bob is 14 years old.

None of the children have any income of their own.

Maureen is a very successful accountant with net business income in 2020 of $216,000. Her
partner, Sue, works on a part time basis in retail. Her 2020 gross employment income is $24,000.
In addition, because she was previously married, she receives child support payments of $1,200
per month from the father of Lori.
Both Maureen and Sue spend a considerable amount of time at their work and, because of
this, they employ a full time person to care for the children. The cost for this care is $12,480
($260 per week for 48 weeks).
During the four week period in the summer when they do not employ the child care worker, the
children attend a live-in camp. The cost for this camp is $2,000 per week, per child.
In January 2020, Maureen slipped on an icy sidewalk and broke both of her ankles. As a conse-
quence of this accident, she spent three weeks in the hospital.
Sue has always been concerned about her lack of formal education. To make progress in this
area, she enrolls in an intensive five week accounting course at a designated educational institu-
tion. Class attendance and work in this course require nearly 60 hours per week of Sue’s time.
Required: Determine the maximum amount that can be deducted by Maureen and Sue for
child care costs for the year ending December 31, 2020.

(Pension Income Splitting - No OAS)
John Gupra is 57 years of age. As he began working at an early age for a company with a very
generous pension plan, he retired at age 55. During 2020, he receives payments from this plan
of $64,000. During 2020 he also has net rental income of $23,000. John has no other sources
of income during 2020.
John’s wife, Fatima, is 45 years of age. For 2020, her only income is $8,400 of interest on her
savings account.
Neither John nor Fatima have any tax credits other than the basic personal credit, spousal credit,
and pension income credit. Further, they have no deductions that will be used in the determina-
tion of Taxable Income.
Required: John would like to split his 2020 pension income with Fatima. Calculate the
maximum amount of 2020 federal tax savings that would result from this tax planning strategy.

(Pension Income Splitting With OAS)
Martin Jones and his wife, Sally, are both 68 years of age. Sally received OAS payments of
$7,400 during 2020. In addition to her OAS benefits, Sally earns interest of $43,000 during 2020.
The investments that provide this interest were inherited from her mother. Because of a serious
accident several years ago, Sally qualifies for the disability tax credit.
During 2020, Martin receives an annual pension benefit from his former employer of $124,000.
This is his only source of income other than the OAS payments described in Scenario 2 below.

Scenario 1 Martin prepares his and Sally’s tax returns and does not split his pension
income. Martin has never applied for OAS payments, thinking that they would simply be
clawed back by the government because of his ongoing high level of income.
Scenario 2 An accountant prepares Martin and Sally’s tax returns and splits Martin’s
pension income, with $62,000 going into each of their tax returns. Martin applied for
OAS as soon as he turned 65 and received $7,400 in OAS benefits in 2020.
Neither Martin nor Sally are eligible for any tax credits other than the basic personal credit, the
age credit, the pension income credit, and the disability tax credit. Further, they have no deduc-
tions that will be used in the determination of Taxable Income.
Required:
A. Calculate the amount of Net Income For Tax Purposes and Taxable Income for both Martin
and Sally under each of the two scenarios.
B. Based on your figures from Part A, calculate the amount owing to the CRA for both Martin
and Sally under each of the two scenarios. Provide a comparison of the amounts owing
under the two alternatives.

(Other Income And Deductions Including RESP)
Harvey Masters is 36 years old. He has custody of his 9 year old son from a previous marriage
and is currently married to a very successful trial lawyer. Her income regularly exceeds $250,000
per year.
Although he did well selling real estate, Mr. Masters has decided to change careers and become
an accountant. He has been told by trusted sources that it is a lucrative profession that will per-
mit him to spend much more time with his family while earning an obscene amount of money.
Mr. Masters commenced studies on a full time basis at the University of Manitoba in Winnipeg
on January 1, 2020. In June 2020, after completing his first semester and extra catch up courses
with an A + average, Mr. Masters and his son moved from Winnipeg to a rented cottage at
Pelican Lake, approximately 200 km from his Winnipeg home.
For the summer, he worked for a real estate firm at Pelican Lake on a part time basis. The total
cost of renting a van and loading it for his move to Pelican Lake was $350.
In August, he returned to Winnipeg in preparation for the September semester. Due to the
increased demand for moving vans, the total cost of renting a van and loading it for his move
back to Winnipeg was $500.
On receipt of an inheritance in February 2020, Mr. Masters opened a Tax Free Savings Account
(TFSA) and contributed $10,000. At the same time, his wife contributed another $10,000 to his
TFSA. Mr. Masters did not have a TFSA prior to this time.
During 2020, Mr. Masters received the following amounts:
Wages from summer employment 5,400
Scholarship granted by university for September 2020 semester 3,500
Eligible dividends received from Canadian public corporations 2,000
Child support received 6,000
Inheritance 25,000
TFSA withdrawal 13,000

On December 15, 2020, Mr. Masters contributed $5,300 to his 9 year old son’s Registered Edu-
cation Savings Plan. Mr. Masters’ parents have contributed to the RESP in the past, but this is
the first year that Mr. Masters has contributed.
Required:
A. Determine the minimum Net Income For Tax Purposes that Mr. Masters will have to report
for his 2020 taxation year. Provide reasons for omitting items that you have not included in
your calculations.
B. Provide any advice you feel would assist him in planning future actions concerning his
son’s RESP.

(Non-Arm’s Length Transfer Of Land)
Martin Forest has owned a tract of land for over 10 years. He acquired the land at a cost of
$360,000. An appraiser has advised him that the land has a current fair market value of $500,000.
It is Martin’s intention to sell the land.
The following four Cases make different assumptions as to the identity of the purchaser and the
proceeds of disposition. In each Case, we will assume that the purchaser immediately re-sells
the land for its fair market value of $500,000.
Case 1 Martin sells the land to an arm’s length party for $500,000.
Case 2 Martin sells the land to his sister for its cost of $360,000.
Case 3 Martin gifts the land to his 10 year old son.
Case 4 Martin sells the land to his mother for $600,000.
Required:
A. For each of the alternatives under consideration, advise Martin of the tax consequences that
will result from the disposition. Indicate the tax consequences to the purchaser of the land
when it is resold.
B. In those cases where the land is sold by Martin for a value other than fair market value,
indicate what might motivate him to make the sale at that price.

(Non-Arm’s Length Transfer Of Depreciable Asset)
The following two scenarios involve a non-arm’s length transfer of a depreciable asset.
Scenario 1 - FMV Greater Than Capital Cost Martin Bolen owns a depreciable asset
with a fair market value of $87,000. It has a capital cost of $52,000 and a UCC of $36,000.
It is the only asset in its class. He sells the asset to his sister for cash of $87,000.
Scenario 2 - FMV Less Than Capital Cost Marion Bolen owns a depreciable asset
with a fair market value of $142,000. It has a capital cost of $212,000 and a UCC of
$105,000. It is the only asset in its class. She sells the asset to her brother for cash of
$142,000.

Required: For each of the two scenarios, indicate the tax consequences for the transferor
that result from the sale. In addition, indicate the tax values that will be used by the transferee
subsequent to the transfer.

(Deemed Dispositions At Death Including Disposition Of Land And Building)
Ms. Margarette Ferrero lives with her spouse, Gianni Ferrero. On August 3, 2020, Margarette
dies of a heart attack while competing in a 10 kilometre race.
Margarette and Gianni have a 32 year old daughter, Ciara. Ciara is employed with a large public
company and, for 2020, has employment income of $72,000. As she actively trades in the stock
market, she normally experiences taxable capital gains of at least $25,000 per year. This was the
case for 2020, and the three preceding years.
For several years, Margarette owned a commercial rental property in Lethbridge. The property
was acquired at a cost of $623,000, with $473,000 of this total allocated to the building and
$150,000 allocated to the land. As it is a rental property with a value in excess of $50,000, it is
allocated to a separate Class 1. Since its acquisition, the building has always been fully occupied.
As of January 1, 2020, the UCC balance for this Class 1 is $363,000.
As of the date of Margarette’s death, it is estimated that the fair market value of the property has
increased to $746,000, with $571,000 of this total allocated to the building and the remaining
$175,000 allocated to the land.
Due to a major city improvement project that started at the beginning of 2021, the main road
access to the building will be under construction for at least three years. As a result, on May 1,
2021, the building is sold for $685,000, with $525,000 of this total being allocated to the building
and the remaining $160,000 allocated to the land.
Required:
A. For each of the following Cases, indicate the tax effects to be included in Margarette’s tax
return as a result of the 2020 deemed disposition at her death, as well as the tax effects
associated with the 2021 sale of the property.
Case 1 Margarette’s will leaves the apartment building to her spouse, Gianni. During
2020, Gianni continues to operate the building and takes maximum CCA for that year.
Case 2 Margarette’s will leaves the apartment building to her daughter, Ciara.
During 2020, she continues to operate the building and takes maximum CCA for
that year.
B. Assume that in Case 2, the proceeds of the 2021 sale of the property by Ciara were allo-
cated $300,000 to the land and $385,000 to the building. Calculate the tax effects associ-
ated with the sale of the property for Ciara.

(Income Attribution)
For a number of years, Mr. Alonso Robelo has owned 15,000 shares of Lisgar Inc., a Canadian
public company. These shares were acquired at a cost of $12.50 per share.

On March 2, 2020, Alonso gives 5,000 shares of these shares to his spouse, Alice. The remaining
10,000 shares are given to his 12 year old son, Alonso Jr. On this date the shares are trading at
$17.00 per share.
On July 1, 2020, the Lisgar Inc. shares pay an eligible dividend of $0.80 per share.
On November 1, 2020, Alice and Alonso Jr. sell all of their Lisgar Inc. shares for $16.00 per
share.
Required: Determine the total Net Income For Tax Purposes to be recorded for the 2020
taxation year by Alonso, his spouse Alice, and his son Alonso Jr., on the preceding transactions.
Assume that Alonso did not elect out of the ITA 73(1) spousal rollover provision.

(Gifts And Income Attribution)
Mrs. Sarah Long, a management consultant, is married with two children. Her son, Barry, is
27 years old and her daughter, Mary, is 13. Mrs. Long has not previously gifted or sold property
to her husband or either of her children.
On April 1 of the current year, Mrs. Long owns the following properties:
Long Consulting Ltd. Mrs. Long owns 100 percent of the voting shares of Long
Consulting Ltd., a Canadian controlled private corporation. These shares have a cost of
$210,000 and a current fair market value of $475,000.
Rental Property Mrs. Long owns a rental building. The building was acquired at a
cost of $190,000. On April 1 of the current year, its UCC is $125,000 and its fair market
value is estimated to be $275,000. Assume the fair market value of the land on which
the building is situated has been $100,000 since the building’s acquisition and remains
at this value for the next three years.
Dynamics Inc. Mrs. Long owns 4,000 shares of Dynamics Inc., a Canadian public
company. These shares have a cost of $212,000 and a current fair market value of
$384,000.
Farm Land Mrs. Long owns farm land with a cost of $80,000 and a current fair market
value of $175,000. Mrs. Long’s son, Barry, uses the farm land on a full time basis to
grow various crops.
Mrs. Long is considering giving all or part of the properties to her spouse and/or her two chil-
dren. Assume that each property is sold two years after being gifted for $50,000 more than its
fair market value at the time of the gift. Also assume that the recipient of the rental property
does not take CCA prior to the subsequent sale of the property.
Required: For each of the assets, provide the tax consequences if the property is gifted to:
1. Her husband and she does not elect out of ITA 73(1).
2. Her husband and she does elect out of ITA 73(1).
3. Her 13 year old daughter, Mary.
4. Her 27 year old son, Barry.
The “tax consequences” should include:

• the income that will be recognized by Mrs. Long at the time of the transfer;
• the tax cost of the asset in the hands of the transferee;

• the tax treatment of any income earned on the asset, including dividends, rental income, or
farm income; and
• the income that will be recognized by Mrs. Long and/or the recipient of the gift when the
asset is sold two years after it was gifted.
Ignore the possibility that either the lifetime capital gains deduction or the tax on split
income is applicable to any of these transactions. (These provisions are covered in Chapter 11
of the text.)

Carolyn Hadley is 29 years old and recently divorced. The terms of the 2019 divorce settle-
ment require that her former spouse pay $1,000 per month in child support, as well as $500
per month in spousal support. Because he lost his job in 2020, payments during this year have
totaled only $12,500.
Carolyn has two children. Her younger child, Deborah, is 4 years old. Her older child, Mark, is
7 years old. Neither child has any income of their own.
Prior to the divorce, the family had lived in property that Carolyn owned in Lethbridge, Alberta.
Prior to 2020, Carolyn had been a stay at home mom with no source of income of her own.
Because she knew her support payments would not provide an adequate amount of income for
her family, she accepted a job in Edmonton, Alberta. Her employment contract calls for her to
begin work on March 1, 2020.
During January 2020, Carolyn made several house hunting trips to Edmonton. The cost of these
trips was $785. In February, she made an offer on an Edmonton home and it was accepted. The
closing date for the sale is March 10, 2020. Her Lethbridge house was sold, with a closing date of
February 15, 2020.
After the closing on her Lethbridge home, she and her children spent 14 days in a Lethbridge
hotel. The trip to Edmonton was 506 kilometres and took two days as she drove very slowly
because she was pulling a trailer. Carolyn stayed overnight with family in Calgary en route. On
arriving in Edmonton, she spent an additional nine days in hotels prior to her new home becom-
ing available.
Carolyn will use the simplified method of calculating meal and vehicle costs for the trip to
Edmonton. Assume that the 2020 vehicle rate is $0.59 per kilometre and the 2020 rate for meals
is $51 per day per person.
The various other costs associated with the real estate transactions and the move to Edmonton
are as follows:
Selling Costs Of Lethbridge Property $12,500
Legal Fees - Sale Of Lethbridge Property 600
Legal Fees - Purchase Of Edmonton Property 450
Storage Costs - February 15 Through March 10 1,400
Cost Of Moving Belongings 7,250
Lodging In Lethbridge After Closing [(14 Days)($175)] 2,450
Lodging In Edmonton Prior To Closing [(9 Days)($200)] 1,800
After moving to Edmonton, Carolyn incurred child care costs of $175 per week for 38 weeks.
Both children spent two weeks during the summer at a camp near Red Deer. The camp cost
$500 per week for each child.

The family’s 2020 medical and dental expenses were as follows:
Carolyn $1,200
Deborah 4,200
Mark 2,200
Total $7,600
Carolyn’s new employer is a large Canadian public company. Her basic salary is $5,000 per
month and, during 2020, her employer withheld the following amount from her earnings.

EI 856
CPP 2,898
United Way Contributions 600
Her employer makes a matching contribution to her RPP of $2,600.

Her employer provides her with an automobile that the company acquired on April 1, 2020, at a
cost of $42,000. During 2020, she drove the car a total of 46,000 kilometres, of which 38,000 were
employment related. The company paid all of the operating costs of the vehicle, a total of $7,200
during 2020. The car was used by Carolyn from April 1, 2020, through December 31, 2020.
Her employer provides an allowance for food and lodging while travelling on company business.
The allowance is $600 per month, a total of $5,400 for the nine months that Carolyn was travel-
ling for her employer during 2020. Her actual cost for employment-related food and lodging in
2020 totaled $5,700.
Her employer also provides a moving cost allowance of $10,000. In addition, the employer
is reimbursing Carolyn for the $4,000 loss on the sale of her Lethbridge home, as well as
providing a $7,500 payment to assist with the higher housing costs she has encountered in
Edmonton.
During 2019, Carolyn is given a group of securities by her father. The adjusted cost base of these
securities was $45,000 in the hands of her father. At the time of the gift, their fair market value
was $62,000. During 2020, these securities pay eligible dividends of $5,800. In December 2020,
Carolyn sells these securities for $74,000.
In June 2020, Carolyn’s mother dies, leaving her with a rental property that has a fair mar-
ket value of $320,000, of which $50,000 represents the value of the land. At the time of her
mother’s death, the UCC of the building was $240,000 and it was not occupied by a tenant.
Her mother had purchased the property several years ago for $400,000. At the time her mother
acquired the property it was estimated that the value of the land was $100,000. Carolyn was not
able to find a tenant and, in December 2020, she sells the property for $340,000. An appraiser
indicates that the value of the land at this time is unchanged at $50,000.
Required: Calculate the following for Carolyn:

• Her minimum 2020 Net Income For Tax Purposes
• Her minimum 2020 Taxable Income
• Her minimum 2020 federal Tax Payable
Ignore GST and HST considerations and any amounts of income tax that would have been
withheld by Carolyn’s employer.


John Winded celebrated his 65th birthday on February 14, 2020. On February 28, 2020, John
retired from Celebrate Ltd., a public corporation, after 35 years of service. John’s annual remu-
neration was $84,000. A review of his last pay stub reveals the following deductions:
CPP contributions $700
EI premiums 200
RPP contributions 500
Employee premiums to the company dental and health plan 150
John had the use of a company car for January and February. The car was leased at a monthly
rate of $360. During these two months, Celebrate Ltd. paid the $800 in automobile operating
expenses. John drove a total of 3,000 kilometres, 90 percent of which were personal.
As a token of their appreciation for John’s dedicated service, the company gave him a watch
that cost $700.
Since John wanted to live in the Vancouver area once retired, he asked his employer to transfer
him from their Winnipeg to their Vancouver office, effective January 1, 2020. He incurred the
following expenses related to his move:
October 2019
Air fare for John and his spouse for trip to Vancouver to find a home $ 900
Hotel for four days in Vancouver for purposes of finding a new home 800
Meals while in Vancouver for purposes of finding a new home 320
Car rental while in Vancouver for purposes of finding a new home 325
December 2019
Legal fees and land transfer taxes on purchase of new home $ 4,800
January 2020
Air fare for John and his spouse to Vancouver $ 1,200
Legal fees and commissions on sale of old home (sold in January 2020) 13,000
Cost of transporting furniture and other household goods
from Winnipeg to Vancouver 4,000
Mr. Winded has kept all of his receipts with respect to his moving costs.
Mr. Winded made sure he acquired the maximum allowable number of shares under the com-
pany stock option plan prior to his retirement date. On February 1, 2020, when the shares
were trading for $11 per share, he acquired 1,500 shares at $8 per share. When the option was
granted, the shares were trading for $7 per share. Mr. Winded sold 1,000 of the 1,500 shares in
June 2020 for $17 per share. Mr. Winded did not own any other shares of Celebrate Ltd., other
than the ones he acquired in February.
Mr. Winded received the following “pension” income for the period March 1 through
December 31:
Old Age Security $ 5,350
Canada Pension Plan 9,600
Pension Income from his company pension plan 44,000
Registered Retirement Income Fund 8,000
Mr. Winded also has a number of investments. During 2020, he received interest income of
$3,478 and eligible dividends from Canadian public corporations of $1,700. He owns shares of
Sail Ltd., a private investment corporation that is controlled by his brother-in-law. During 2020,
he received non-eligible dividends from Sail Ltd. of $800.

Mr. Winded owns two rental properties. The information for 2020 is as follows:
Property A Property B
Rental Revenues $ 98,000 $62,000
Operating Expenses ( 104,000) ( 54,000)
Net Rental Income (Loss) ($ 6,000) $ 8,000
Class 1 UCC Balance - January 1 $180,000 $210,000

Class 8 UCC Balance - January 1 12,000 16,000
Mr. Winded divested himself of a number of capital assets during 2020:
Description Cost Gross Proceeds

Stamp collection $ 8,000 $ 5,000
Rare book 700 4,200
Furniture 4,800 900
Painting 300 800
Shares of Sail Ltd. (Note 1) 12,000 48,000
Shares of CNR Company Note 2 20,100
Shares of BCE Ltd. Note 2 36,000
Sale of Winnipeg home (Note 3) 140,000 313,000
Sale of Lake Winnipeg cottage (Note 3) 80,000 290,000
Note 1 Sail Ltd. is a private company whose shares do not qualify for the lifetime
capital gains deduction.
Note 2 Mr. Winded’s history of purchases and sales in the shares of Canadian National
Railway (CNR) Company and BCE Ltd. are as follows:
May 1, 2016, purchase 200 CNR shares @ $52 per share

May 1, 2018, sale 400 CNR shares @ $55 per share
May 1, 2020, sale 300 CNR shares @ $67 per share
July 11, 2020, purchase 1,000 BCE shares @ $38 per share
August 1, 2020, sale 1,000 BCE shares @ $36 per share
August 29, 2020, purchase 600 BCE shares @ $39 per share
Note 3 The cottage was acquired in 2005. It was sold for gross proceeds of $290,000.
Mr. Winded incurred $10,000 of selling costs on this property.
The Winnipeg home, which was acquired in 2011, was sold for gross proceeds of
$313,000. Mr. Winded incurred selling costs of $13,000 on the sale of his Winnipeg
home.
Mr. Winded has operated a sideline woodworking business for 10 years, which he has continued
in Vancouver. For 2020, the details are as follows:
Revenues $38,000
Supplies 16,000
Advertising 1,000
Purchase of a new computer 3,800
Purchase of woodworking equipment 1,600
Purchase of two hand tools 450

Mr. Winded converted his large Vancouver garage to a woodworking shop in December 2019.
The shop occupies 20 percent of the total area of his Vancouver home. His 2020 home expenses
are as follows:
Mortgage interest $4,000
Utilities 3,600
Property taxes 4,500
Home telephone line 700
Insurance 1,400
Maintenance 1,800
As he does not wish to have to report any capital gain or recapture upon its eventual disposition,
Mr. Winded will not claim CCA on the portion of his home that is used in his woodworking busi-
ness. The only UCC balance related to his woodworking business as at January 1, 2020, is the
Class 8 UCC balance of $2,400.
Mr. Winded’s spouse, Rachel, is 67 years old. Her 2020 income consists of $7,400 in Old Age
Security, $3,100 from the Canada Pension Plan, and $1,400 of eligible dividends that she received
from preferred shares that were given to her as a birthday present in 2019 by her husband. The
shares, which have an adjusted cost base of $27,000, were sold for $31,000 in 2020.
Mrs. Winded is disabled and qualifies for the disability tax credit. In 2020, she incurred $4,600
in medical expenses, $1,200 of which was reimbursed by Mr. Winded’s dental and health plan
when he was an employee of Celebrate Ltd.
In 2020, Mr. Winded made $3,700 in charitable donations to registered charities.
Mr. and Mrs. Winded would like to use all possible elections, including pension income splitting,
in order to minimize their combined tax liability.
Required: In determining these amounts, ignore GST, PST, and HST considerations. Also,
assume that there are no excess or deficient CPP contributions and that the full amount
contributed is eligible for the CPP tax credit.
A. For the 2020 taxation year, calculate Mr. and Mrs. Winded’s Net Income For Tax Purposes
and Taxable Income.
B. For the 2020 taxation year, calculate Mr. and Mrs. Winded’s Federal Balance Owing Or
Refund (tax plus any social benefits repayment).

SSS Problem Nine–1


(Moving Expenses)
Yolanda has lived in Regina for most of her life. While she thought she was happily married, she
has discovered that her husband of many years was having two affairs. One with her sister and the
other with her brother. She immediately begins divorce proceedings. She also asks her employer, a
large public company, transfer her to their Calgary office.
Her employer agrees to this move and, during October 2020, Yolanda flies to Calgary to locate
suitable housing. On her second day in that city, she finds a suitable apartment and leases it for
$2,900 per month beginning December 1. She remains in Calgary for an additional three days to
find furnishings for the unit. The costs associated with this trip are as follows:
Air Fare - Return $765
Rental Car Costs (5 Days) 385
Hotel (5 Nights At $225) 1,125
Food (5 Days - Total) 280
As part of the divorce settlement, Yolanda received the family residence. She sells it in November
2020 for $327,000. She uses $212,000 of the proceeds to pay off the existing mortgage on the
property. Because of her desire for a very quick sale, she sells the house for $30,000 less than
her cost. Costs associated with the sale are as follows:
Real Estate Commissions $16,350
Legal Fees 425
Unpaid Property Taxes To Date Of Sale 1,100
Cost Of Cleaning And Minor Repairs Prior To Sale 2,750
In order to clean up various business and personal issues, she remains in Regina for seven days
subsequent to the sale of the house. On November 16, Yolanda leaves for Calgary by air. As her
new apartment does not become available until December 1, she spends the next 14 days in a
hotel in Calgary.
Her expenses for the period November 9 through December 1 are as follows:
Hotel In Regina (7 Nights At $160) $9,100
Food In Regina (7 Days - Total) 410
Air Fare - One Way 400
Hotel In Calgary (14 Nights At $215) 3,010
Food In Calgary (14 Days - Total) 950
Yolanda contracts a car moving company to transport her car to Calgary and it is delivered on
November 17. The cost for this service is $500.
A moving company takes care of moving Yolanda’s personal belongings to Calgary. The invoice
for this service is $2,800, In addition, there is a $900 charge for storing these belongings until the
Calgary apartment becomes available.
Yolanda begins working at the new location on December 1, 2020. Her salary is $7,500 per
month, with the first 11 months of 2020 being paid by the Regina office, the remaining one month
being paid by the Calgary office.

Yolanda’s employer has agreed to the following to provide assistance with the move:
• They will provide her with a $12,000 allowance to cover her general moving costs.
• They will compensate her for $20,000 of the loss on the sale of her Regina home.
All of these amounts will be paid by the Calgary office during December 2020.
Yolanda will use the simplified method of determining food costs in calculating her moving
expenses. Assume that the flat rate for meals is $51 per day.
Required: Determine the amount of Yolanda’s maximum 2020 deduction for moving expenses. In
addition, indicate the amount of any carry forward that is available at the end of the year.

Mr. and Mrs. Harris have four children and, at the end of 2020, their ages are 5, 10, 12, and 15.
The 15 year old child has a prolonged physical handicap, which qualifies him for the disability tax
credit.
Mrs. Harris is a stockbroker and had 2020 salary and commissions of $263,500. Mr. Harris is
involved in a travel business and, due to some bad strategic decisions, his share of the earnings of
this business for the year ending December 31, 2020, amounts to only $4,200. In addition to his
business earnings, Mr. Harris has interest income for 2020 of $12,500.
As both spouses must spend considerable time at work, full time child care is required. As a
consequence, their payments for child care amount to $250 per week for 49 weeks of the year.
With respect to the other three weeks, all of the children attend a summer camp with a special
program for their disabled son during the month of June. The cost of this camp is $3,000 per child,
or a total of $12,000 for the three weeks.
In February 2020, Mr. Harris fell off a chair lift while skiing and was in the hospital for a period of
four weeks.
In late September 2020, Mrs. Harris is convicted of insider trading activities and sentenced to six
months in prison. She immediately begins serving the sentence and spends the last 12 weeks of
2020 in jail.
Required: Determine the maximum amount that can be deducted by Mr. and Mrs. Harris for child
care costs for the year ending December 31, 2020.

(Pension Income Splitting - No OAS)
Harry Cheung is 67 years of age. He was a long term employee of a Canadian public company that
sponsored a very generous registered pension plan. Now that he has retired, he is receiving an
annual pension benefit of $92,000 per year. Since his retirement, he has continued to work on a
part time basis as a consultant. For 2020, his net income from his consulting work was $41,000.
Harry has not applied to receive OAS payments.
Harry’s wife, Loretta, is 63 years of age. She has never worked outside the home and, for 2020, her
only income is interest of $2,800 on term deposits.
Neither Harry nor Loretta have any tax credits other than the basic personal credit, spousal credit,
age credit, and pension income credit. Further, they have no deductions that will be used in the
determination of Taxable Income.

Harry will split his 2020 pension income with Loretta on a 50:50 basis.
Required: Calculate the amount of 2020 federal tax savings that would result from the pension
income splitting.

(Non-Arm’s Length Transfer Of Shares)
John Bolton owns 5,000 shares of Marker Manufacturing Ltd., a Canadian public company. These
shares were purchased three years ago, at a price of $45 per share. They are currently trading at
$105 per share.
John is planning to transfer these shares to his 35 year old brother, Alex Bolton, who will imme-
diately sell them at their fair market value of $105 per share. John is considering four alternatives
for the transfer:
A. The 5,000 shares are sold to Alex Bolton at a price of $75 per share.
B. The 5,000 shares are sold to Alex Bolton at a price of $125 per share.
C. The 5,000 shares are sold to Alex Bolton at a price of $105 per share.
D. The 5,000 shares are given to Alex Bolton as a gift.
Required: For each of these four alternatives, determine the effect on Net Income For Tax
Purposes of John Bolton and Alex Bolton for the current year. Include in your solution the adjusted
cost base that will apply for Alex Bolton.

(Non-Arm’s Length Transfer Of Depreciable Asset)
The following two independent Cases involve a non-arm’s length transfer of a depreciable
asset.
Case One Jason Lasarge owns a depreciable asset with a fair market value of $255,000.
It has a capital cost of $187,000 and a UCC of $145,000. It is the only asset in its class. He
sells this asset to his brother for cash of $255,000.
Case Two Christine Drummond owns a depreciable asset with a fair market value
$320,000. It has a capital cost of $520,000 and a UCC of $240,000. It is the only asset in
its class. She sells the asset to her sister for cash of $320,000.
Required: For each of the two cases, indicate the tax consequences for the transferor that result
from the sale. In addition, indicate the tax values that will be used by the transferee subsequent to
the transfer.

(Deemed Dispositions At Death)
Years ago, Mr. Forsyth purchased a small apartment building at a cost of $350,000. Of the total
cost, $100,000 was allocated to the land with the $250,000 balance going to the building. At the
beginning of 2020, the UCC of the building was $170,000.
On October 10, 2020, Mr. Forsyth is killed in an automobile accident. At the time of his death, the
fair market value of the land was $212,000 and the fair market value of the building was $325,000.

In February 2021, the building is sold for a total price of $600,000, of which $225,000 is allocated to
the land and $375,000 to the building.
Required: Indicate the tax effects to be included in Mr. Forsyth’s tax return as a result of the 2020
deemed disposition at his death and calculate the tax effects associated with the 2021 sale of the
building in both of the following Cases:
Case A His will leaves the apartment building to his 23 year old daughter, Eileen. During
2020, she continues to operate the building and takes maximum CCA for that year.
Case B His will leaves the apartment building to his wife, Christine. During 2020, she
continues to operate the building and takes maximum CCA for that year.

(Income Attribution - Use Of Loans)
During the current year, Mr. Langdon makes a non-interest bearing loan of $100,000 to his wife,
who acquires a $100,000 bond with the proceeds. He also makes a non-interest bearing loan of
$100,000 to both of his children:
• Pat, aged 15, who uses the funds to acquire a $100,000 bond, and
• Heather, aged 23, who uses the funds as a down payment on her principal residence. Without
this loan she would have paid mortgage interest of $6,000 during the year.
During the year, the bonds acquired by Mr. Langdon’s spouse pay interest of $5,000. The bonds
acquired by Pat pay interest of $5,500.
Required: Determine the amount of income that will be attributed to Mr. Langdon for the current
taxation year as the result of the non-interest bearing loans.

(Gifts And Income Attribution)
Mr. Goodby, a self-employed contractor, is married and has two children. His son, Harry, is
25 years old and his daughter, Martha, is 14. Mr. Goodby has not previously gifted or sold property
to his spouse or either of his children.
At the end of the current year, Mr. Goodby owns the following property:
Farm Land Mr. Goodby owns farm land that cost $160,000 and has a current fair market
value of $350,000. Mr. Goodby’s son, Harry, uses the farm land on a full time basis to
grow various crops.
DRC Ltd. Mr. Goodby owns 5,000 shares of DRC Ltd., a Canadian public company.
These shares have a cost of $320,000 and a current fair market value of $573,000.
Rental Property Mr. Goodby owns an apartment building. The building was acquired at
a cost of $380,000, including an estimated value for the land of $124,000. At the end of the
current year, the UCC of the building is $178,000 and its fair market value is $510,000,
including an unchanged value for the land of $124,000.
Goodby Construction Company Mr. Goodby owns 100 percent of the voting shares of
Goodby Construction Company, a Canadian controlled private corporation. These shares
have a cost of $227,000 and a current fair market value of $452,000. Goodby Construction
is not a qualified small business corporation for purposes of the lifetime capital gains
deduction.

Mr. Goodby is in poor health and is considering giving all or part of the properties to his spouse
and/or his two children.
Required: You have been hired as a tax consultant to Mr. Goodby. He would like a report that
would detail, for each of the four properties, the tax consequences to him of making a gift of the
item to his wife or to either one of his children. Your report should include:
• the tax consequences to Mr. Goodby at the time of the gift;
• the tax cost of the properties to the recipient of the gift;
• the tax treatment of any income on the property subsequent to the gift; and
• the tax consequences that would result from a subsequent sale of the gifted property at
$40,000 more than its fair market value at the time of the gift (assume that there is still no
change in the value of the land).
In preparing your answer, assume that:
• Mr. Goodby does not elect out of ITA 73(1) when the gifts are made;
• the recipient of the rental property does not take CCA prior to the subsequent sale of the
property; and
• the Tax On Split Income is not applicable to any of the results.

Solution to SSS Problem Nine–1

Income At New Location
As both the general moving allowance and the compensation for the housing loss were paid for by
the Calgary office, these would likely be considered income at the new location. Given this view,
Yolanda’s employment income at the new location can be calculated as follows:
General Moving Allowance $12,000

Compensation For Loss On Regina Residence (Note 1) 2,500
Salary At New Location (1 Month) 7,500
Total Employment Income At New Location $22,000
Note 1 Under ITA 6(20), one-half of any housing loss reimbursement in excess of
$15,000 must be included in income. As the total reimbursement was $20,000, the
inclusion would be $2,500 [(1/2)($20,000 - $15,000)].
Deductible Expenses
Deductible moving expenses can be calculated as follows:
Real Estate Commission - Regina Home $16,350
Legal Fees - Regina Home 425
Other Regina Home Costs (Not Deductible) Nil
Car Moving Costs 500
Moving Company Costs ($2,800 + $900) 3,700
Costs Of Lodging (Note 2):
House Hunting Trip (3 Nights At $225) 675
In Calgary (12 Nights At $215) 2,580
Food - Maximum (15 Days At $51 Flat Rate) 765
Costs Of Airfare On Move To Calgary 400
Moving Expense Deductions Available $25,395
Note 2 Costs for food and lodging at or near an old or new residence are limited to a
maximum period of 15 days. As soon as the lease is signed (assuming that the person
doesn’t back out before the lease actually begins) the premises is a new residence.
Yolanda has a total of 24 days; 3 days after she signs the lease in Calgary at $225 per day,
7 days in Regina at $160 per day, and 14 days in Calgary at $215 per day.
As they are the most expensive days, she will deduct the first 3 days in Calgary at $225 per
day for a total of $675 [(3)($225)], followed by the remaining 12 days in Calgary at $215 per
day. The total here is $2,580 [(12)($215)].
Actual Deduction
The actual 2020 deduction will be limited to $22,000, the amount of income earned at the new
location. This will leave a carry forward to 2021 of $3,395 ($25,395 - $22,000).


The deductible actual costs are as follows:
Actual Costs Excluding Camp Costs (49 weeks At $250) $12,250
Periodic Cost Limit For Camp Weeks
[($125)(2)(3 weeks) + ($200)(1)(3 weeks) + ($275)(1)(3 weeks)] 2,175
Deductible Actual Costs $14,425
Generally, the spouse with the lower income must claim the deduction for child care expenses.
However, under certain circumstances, the spouse with the higher income can claim the deduction.
One of these circumstances is when the lower income spouse is hospitalized. In this case, the
higher income spouse can claim the deduction for the period of hospitalization. Thus, for the four
weeks that Mr. Harris was hospitalized, Mrs. Harris can claim child care costs.
The relevant calculations for determining the deductible costs for each individual are as follows:
Mrs. Harris Mr. Harris
Actual Costs And Limited Camp Costs $ 14,425 $14,425
Annual Expense Limit
[($5,000)(2) + ($8,000)(1) + ($11,000)(1)] $ 29,000 $29,000
2/3 Of Earned Income
[(2/3)($263,500)] $175,667
[(2/3)($4,200)] $ 2,800
Periodic Expense Limit [($125)(2)(4 weeks)
+ ($200)(1)(4 weeks) + ($275)(1)(4 weeks)] $ 2,900 N/A
The least of these amounts for Mrs. Harris is $2,900. You should note that there is no requirement
that actual payments be allocated on the basis of the time that Mr. Harris was hospitalized.
The lowest figure for Mr. Harris is $2,800, two-thirds of his earned income. As Mrs. Harris will be
deducting $2,900, Mr. Harris will not be able to deduct any amount of child care costs.
Note that the interest received is not included in Mr. Harris’ earned income.

Net And Taxable Income
Harry’s Income No Split With Split

Pension Receipt $ 92,000 $92,000
Consulting Fees 41,000 41,000
Pension Income To Loretta N/A ( 46,000)
Net And Taxable Income $133,000 $87,000
Loretta’s Income No Split With Split

Interest Income $2,800 $ 2,800
Pension Income From Harry N/A 46,000
Net And Taxable Income $2,800 $48,800

Federal Tax Payable With No Pension Income Splitting

Loretta Loretta’s federal Tax Payable with no pension income splitting would be calculated as
follows:
Tax Before Credits [(15%)($2,800)] $ 420
Basic Personal Credit [(15%)($13,229)] (1,984)
Federal Tax Payable - Loretta Nil
Harry Harry’s federal Tax Payable with no pension income splitting would be calculated as
follows:
Tax On First $97,069 $17,230
Tax On Next $35,931 ($133,000 - $97,069) At 26% 9,342
Total Before Credits $26,572
Credits:
Basic Personal ($13,229)
Spousal ($13,229 - $2,800) ( 10,429)
Age [$7,637 - (15%)($133,000 - $38,508)] Nil
Pension ( 2,000)
Total ($25,658)
Rate 15% ( 3,849)
Federal Tax Payable - Harry $22,723
Federal Tax Payable With Pension Income Splitting
When pension income splitting is used, Loretta’s federal Tax Payable would be calculated as
follows:
Tax On First $48,535 $7,280
Tax On Next $265 ($48,800 - $48,535) At 20.5% 54
Credits:
Pension ( 2,000)
Total ($15,229)
Rate 15% ( 2,284)
Federal Tax Payable - Loretta $5,050
With pension income splitting, Henry’s federal Tax Payable would be calculated as follows:
Tax On First $48,535 $ 7,280

Tax On Next $38,465 ($87,000 - $48,535) At 20.5% 7,885
Credits:
Spousal Nil
Age [$7,637 - (15%)($87,000 - $38,508)] 363
Pension ( 2,000)
Total ($15,592)
Rate 15% ( 2,339)
Federal Tax Payable - Harry $12,826

Comparison
Federal Tax Payable Without Income Splitting (Harry Only) $22,723

Federal Tax Payable With Income Splitting ($5,050 + $12,826) ( 17,876)
Savings With Pension Income Splitting $ 4,847

A. Sale For $75 Per Share
In this case, the shares were transferred at a price that was below fair market value. However,
John Bolton will have deemed proceeds under ITA 69(1)(b) equal to the fair market value of
$525,000 [(5,000)($105)]. The result for John would be as follows:
Deemed Proceeds Of Disposition - ITA 69(1)(b) $525,000
Adjusted Cost Base [(5,000)($45)] ( 225,000)
Inclusion Rate 1/2
Taxable Capital Gain $150,000
From the point of view of Alex Bolton, his cost base for the shares will be limited to the actual price
paid of $375,000 [(5,000)($75)]. This means that, when Alex Bolton sells these shares, the
difference between his proceeds of disposition per share of $105 and the price per share he paid of
$75 would be taxed in his hands. In effect, any gain arising from a sales price of up to $105 will be
subject to double taxation.
With respect to the subsequent sale by Alex, the results for him would be as follows:
Proceeds Of Disposition (Actual) $525,000
Adjusted Cost Base (Actual) ( 375,000)
Inclusion Rate 1/2
B. Sale For $125 Per Share

In this situation, the gain to be recorded by John Bolton would be based on $625,000
[(5,000)($125)], the actual amount received. The result for John would be as follows:
Inclusion Rate 1/2
From the point of view of Alex Bolton, ITA 69(1)(a) would limit his adjusted cost base to $525,000,
the fair market value of the shares at the time of purchase, despite the fact that John had to record
the actual proceeds of $625,000. With respect to the subsequent sale by Alex, the results for him
would be as follows:


Adjusted Cost Base - ITA 69(1)(a) ( 525,000)
Capital Gain Nil
As was the situation in Case A, Case B involves double taxation. In this case it applies to the extra
$100,000 ($625,000 - $525,000) in proceeds of disposition that is recognized in John’s gain but not
in Alex’s adjusted cost base.
C. Sale For $105 Per Share

In this case, both the proceeds to John Bolton and the adjusted cost base to Alex Bolton will be
equal to the amount paid for the shares as it is the fair market value. No double taxation will arise.
The result for John would be the same as for Case A as follows:
Inclusion Rate 1/2
Adjusted Cost Base (Actual) ( 525,000)
Capital Gain Nil
D. Gift
In this case, John Bolton will be deemed to have received proceeds equal to the fair market value
of $525,000 and the adjusted cost base to Alex Bolton will also be equal to the fair market value.
No double taxation will arise. The results will be the same as in Case C.
The result for John would be as follows:
Deemed Proceeds Of Disposition - ITA 69(1)(b) $525,000
Inclusion Rate 1/2
Adjusted Cost Base - ITA 69(1)(c) ( 525,000)
Capital Gain Nil

Summary
These results can be summarized as follows:

John Alex Total
A. Sale For $75 (ACB = $375,000) $150,000 $75,000 $225,000
B. Sale For $125 (ACB = $525,000) 200,000 Nil 200,000
C. Sale For $105 (ACB = $525,000) 150,000 Nil 150,000
D. Gift (ACB = $525,000) 150,000 Nil 150,000
The real economic gain on the two sales is $300,000 ($525,000 - $225,000), a taxable amount of
$150,000. This is reflected in Cases C and D where John either sells the shares at fair market
value or gifts them to his brother Alex. The preceding table reflects the fact that there was double
taxation in Cases A and B, resulting in higher taxable capital gains.

Case One - FMV > Transferor’s Capital Cost
As a result of this disposition, Jason will have a taxable capital gain of $34,000 [(1/2)($255,000 -
$187,000)]. In addition, there will be recapture of $42,000 ($187,000 - $145,000). Jason’s Net
Income For Tax Purposes will increase by $76,000 ($34,000 + $42,000).
For capital gains purposes, the capital cost for his brother will be the transfer price of $255,000.
However, because the fair market value of the asset was greater than its capital cost at the time of
transfer, ITA 13(7)(e) will limit the capital cost for CCA and recapture purposes to the following
amount:
[$187,000 + (1/2)($255,000 - $187,000)] = $221,000
Case Two - FMV < Transferor’s Capital Cost

As a result of this disposition, Christine will have recapture of $80,000 ($320,000 - $240,000) and
her Net Income For Tax Purposes will increase by this amount. As the capital cost of the asset was
greater than the proceeds of disposition, there will not be a capital gain on the transfer.
In this Case, where the fair market value of the asset is less than its capital cost, ITA 13(7)(e)
deems the transferee’s capital cost of the transferred asset to be equal to the transferor’s capital
cost, an amount of $520,000. This capital cost will be used for purposes of determining any capital
gain and/or recapture on a future disposition.
The $200,000 ($520,000 - $320,000) difference between this value and the transfer price will be
considered deemed CCA. The resulting UCC balance of $320,000 ($520,000 deemed capital cost -
$200,000 deemed CCA) will be used by Christine’s sister for calculating future CCA.


Case A
As the transfer was to his daughter, the deemed proceeds will be recorded at fair market value for
the land and building. Based on this, the following calculations show the tax effects that will be
included in Mr. Forsyth’s final return:
Land Building
Deemed Proceeds $212,000 $325,000
Adjusted Cost Base/Capital Cost ( 100,000) ( 250,000)
Capital Gain $112,000 $ 75,000
Taxable Capital Gain $ 56,000 $ 37,500
UCC $170,000
• Deemed Proceeds = $325,000 ( 250,000)
Negative Closing UCC Balance = Recaptured CCA ($ 80,000)
A total of $173,500 ($56,000 + $37,500 + $80,000) would be added to Mr. Forsyth’s 2020 Net
Income For Tax Purposes.
With respect to his daughter’s tax records, the land will have an adjusted cost base of $212,000. In
addition, the building will be a Class 1 asset with a capital cost of $325,000. In calculating the 2020
CCA, two things should be noted:
• ITA 13(7)(e) does not apply to deemed dispositions resulting from the death of a taxpayer. This
provision normally limits the UCC for the acquiring taxpayer to the selling taxpayer’s capital
cost, plus one-half of the difference between the proceeds of disposition and the taxpayer’s
capital cost.
• As the building was previously owned by a non-arm’s length party, it is not eligible for the AccII
provisions. Also, since the acquisition of the building is a non-arm’s length transaction and its
previous use was to produce income, it is exempt from the half-year rules.
Given these consideration, the 2020 CCA will be $13,000 [($325,000)(4%)], leaving a UCC of
$312,000 ($325,000 - $13,000).
Using this information, the 2021 tax effects associated with the sale of the building would be
Land Building
Capital Gain $ 13,000 $ 50,000

UCC $312,000
A total of $44,500 ($6,500 + $25,000 + $13,000) would be added to the 2021 Net Income For Tax
Purposes of Mr. Forsyth’s daughter.
Case B
Assuming that the transfer was to Mr. Forsyth’s spouse rather than to his daughter, his proceeds of
disposition would be equal to the tax cost of the land and building. As a consequence, there would
have been no tax effects to be included in Mr. Forsyth’s final return.
The land, because it is a non-depreciable asset, would be recorded by Christine at its original
adjusted cost base of $100,000. With respect to the building, for purposes of determining capital
gains and losses, Christine would retain Mr. Forsyth’s original capital cost of $250,000. However,
for CCA and recapture purposes, Christine would use Mr. Forsyth’s UCC of $170,000.
During 2020, Christine will take CCA of $6,800 [(4%)($170,000)], leaving a January 1, 2021, UCC
of $163,200.
Using these figures, the tax consequences from Christine’s sale of the land and building would be
as follows:
Land Building
Capital Gain $125,000 $125,000
UCC At Sale $163,200

A total of $211,800 ($62,500 + $62,500 + $86,800) would be added to the 2021 Net Income For
Tax Purposes of Mr. Forsyth’s wife.
Comparison Case A And Case B (Not Required)

The overall tax consequences in the two cases are the same as shown in the following table:
Case A Case A Case B
Mr. Forsyth Eileen Mrs. Forsyth
2020 $173,500 Nil Nil
2020 - CCA Taken ($13,000) ($ 6,800)
2021 44,500 211,800
Net Income For Tax Purposes $173,500 $31,500 $205,000

Mr. Forsyth and Eileen’s increase in Net Income For Tax Purposes total $205,000 ($173,500 +
$31,500), the same amount as the total increase for Mrs. Forsyth.

The general income attribution rules in ITA 74.1 apply to spouses, common-law partners, and non-
arm’s length individuals who are under 18 years of age. This means that the income on the bonds
acquired by Mr. Langdon’s wife and his 15 year child, Pat, would be attributed to him. The total
amount would be $10,500 ($5,000 + $5,500).
A different income attribution rule, ITA 56(4.1), applies to loans made to any related party, if the
loan is made for the purpose of producing property income. As the loan to Heather was not used to
produce income, this attribution rule would not apply.

Farm Land - Gift To Spouse
In the case of the farm land, if he does not elect out of ITA 73(1) there will be no tax conse-
quences at the time of the transfer.
The tax cost to his spouse will be unchanged from his tax cost of $160,000.
Any income generated by the farm would be considered business income rather than property
income. This means that it will not be subject to the income attribution rules and will be taxed in the
hands of Mr. Goodby’s spouse.
In the event of a subsequent sale for $390,000 ($40,000 more than its fair market value at the time
of the gift), the following taxable capital gain would be attributed to Mr. Goodby under ITA 74.1(1):
Inclusion Rate 1/2
Farm Land - Gift To Children

ITA 73(3) permits the transfer of farm property used by the taxpayer or his family to a child on a tax
free basis. This means that Mr. Goodby would incur no taxation at the time of the gift to either child
and the adjusted cost base to either child would be the cost of $160,000.
Any income generated by the farm would be considered business income rather than property
income. This means that it will not be subject to the income attribution rules and will be taxed in the
hands of Mr. Goodby’s children.
If the property were later sold by Harry for $390,000, the resulting capital gain would not be
attributed back to Mr. Goodby. However, if the property is transferred to Martha and she sells the
property for $390,000 ($40,000 more than its fair market value at the time of the gift) prior to
reaching age 18, a capital gain of $230,000 ($115,000 taxable amount) would be attributed back to
Mr. Goodby. Note that, while there is usually no attribution of capital gains from minor children,
there is an exception to this when farm property is transferred on a tax free basis.

DRC Ltd. - Gift To Spouse

These shares could be given to Mrs. Goodby with no immediate tax consequences.
The tax cost to his spouse will be unchanged from his tax cost of $320,000.
Any dividends on the shares will be attributed back to Mr. Goodby.
If his spouse sells the shares for $613,000 ($40,000 more than their fair market value at the time of
the gift), the attribution rules of ITA 74.1(1) would require that the following be allocated to the
income of Mr. Goodby:
Inclusion Rate 1/2
DRC Ltd. - Gift To Children

In the case of a transfer to either of his children, ITA 69 would require that the gift be treated as a
deemed disposition with the proceeds at the fair market value of $573,000. This would result in an
immediate taxable capital gain of $126,500 [(1/2)($573,000 - $320,000)].
The tax base to either of the children would be the fair market value of $573,000.
If the shares were gifted to his 14 year old daughter Martha, any dividends on the shares would be
attributed back to Mr. Goodby. This would not be the case with a gift to his 25 year old son Harry.
If the shares were sold by either child for $613,000, there would be no tax consequences for
Mr. Goodby. However, the selling child would have a taxable capital gain of $20,000
[(1/2)($613,000 - $573,000)].
Rental Property - Gift To Spouse

Here again, ITA 73(1) would permit a tax free transfer to Mrs. Goodby with no immediate tax
consequences.
The tax cost of the property would not be changed. The capital cost would remain at $256,000
($380,000 - $124,000) and the UCC would be unchanged at $178,000.
Any income on the property while it is held by his spouse would be attributed back to Mr. Goodby.
At the time of the gift, the fair market value of the building was $386,000 ($510,000 - $124,000). At
the time of a subsequent sale of the property by Mrs. Goodby for $426,000 ($40,000 more than its
$386,000 fair market value at the time of the gift), the income attribution rules of ITA 74.1(1) would
apply. This would result in the following amounts being attributed to Mr. Goodby at that time:
Land Building
Capital Gain Nil $170,000
Inclusion Rate N/A 1/2
Taxable Capital Gain Nil $ 85,000
Capital Cost $256,000

UCC ( 178,000)
Recapture Of CCA $ 78,000

Rental Property - Gift To Children

There is no exemption from the general rules of ITA 69 for transfers of depreciable property to
children. As a consequence, Mr. Goodby would be subject to taxation based on a disposition of the
property at its fair market value of $510,000. There would be no capital gain on the land. However,
there would be a taxable capital gain of $65,000 on the building [(1/2)($386,000 - $256,000)]
The capital cost of the building to either of the children for capital gains purposes would be
$386,000. For CCA and recapture purposes, the value would be limited to $321,000 [$256,000 +
(1/2)($386,000 - $256,000)].
Any rental income on the property while it is held by his 14 year old daughter would be attributed
back to Mr. Goodby until she reached 18 years of age. This would not be the case if the gift were to
his 25 year old son.
There would be no attribution of capital gains on a gift to either child. If the children subsequently
sold the property for $550,000 ($510,000 + $40,000), there would be a taxable capital gain of
$20,000 [(1/2)($426,000 - $386,000)] that would be taxed in their hands. As the value of the land
remained at $124,000, there would be no capital gain or loss on the land.
Goodby Construction Company - Gift To Spouse

Here again, ITA 73(1) permits transfers of any capital property to a spouse without incurring
taxation at the time of transfer. This means that the shares in Goodby Construction Company could
be gifted to Mrs. Goodby with no immediate tax consequences.
The tax basis for these shares would remain at his cost of $227,000.
Any dividends on the shares will be attributed back to Mr. Goodby.
Should Mrs. Goodby subsequently sell these shares for $492,000 ($40,000 more than its fair
market value at the time of the gift), the following taxable capital gain would be attributed back to
Mr. Goodby under the general rules of ITA 74.1(1):
Proceeds (Fair Market Value) $492,000

Inclusion Rate 1/2
Goodby Construction Company - Gift To Children

There is no exemption from the general rules of ITA 69 for transfers of shares in a Canadian
controlled private corporation to children. As a consequence, Mr. Goodby would have a taxable
capital gain on the transfer to either child of $112,500 [(1/2)($452,000 - $227,000)].
The adjusted cost base to the children would be the fair market value of $452,000.
There would be no income attribution if the shares were gifted to his 25 year old son.
If the shares were subsequently sold for $492,000 by the child receiving the gift, that child would
have a taxable capital gain of $20,000 [(1/2)($492,000 - $452,000)] that would be taxed in their
hands.

Self Study Problem Ten - 1

(Calculation Of PAs, PSPAs, And PARs)
Each of the following independent Cases involves calculations of the Pension Adjustment (PA),
Past Service Pension Adjustment (PSPA), or Pension Adjustment Reversal (PAR) that would be
reported by the employer.
Case 1 Fredia Frye’s employer sponsors a deferred profit sharing plan as well as a
registered pension plan. During 2020, the employer contributed, on Fredia’s behalf,
$2,500 to the deferred profit sharing plan and $1,000 to the registered pension plan.
Fredia also contributed $1,000 to the registered pension plan.
Required: Calculate Fredia’s 2020 pension adjustment.
Case 2 Barton Huling’s employer sponsors a defined benefit registered pension plan.
During 2020, Barton’s employer contributes $3,000 to the registered pension plan on
his behalf. In addition, Barton is required to make a matching contribution of $3,000. The
plan provides a benefit of 1.25 percent of pensionable earnings for each year of service.
For 2020 Barton has pensionable earnings of $71,000.
Required: Calculate Barton’s 2020 pension adjustment.
Case 3 Janee Borel has worked for her current employer since 2018. In January, 2020,
the employer implements a defined benefit registered pension plan, with benefits
extended to employees for all prior years of service. The benefit formula provides for
a benefit equal to 1.1 percent of pensionable earnings for each year of service. Janee’s
pensionable earnings for her current and previous years of service are as follows:
2018 $38,000
2019 42,000
2020 51,000
Required: Calculate Janee’s past service pension adjustment for 2020, as well as her
pension adjustment for 2020.
Case 4 Santiago Premo began working for Atak Ltd. in 2018. The Company sponsors
a defined benefit registered pension plan which requires four years of service prior to
benefits becoming vested. In 2018, the Company reported a pension adjustment for
Santiago of $5,200, followed by a 2019 pension adjustment of $5,400.
At the beginning of 2020, it is discovered that Santiago has been embezzling corporate
funds during the last few months of 2019. He is immediately fired and the Company is
considering criminal charges.
Required: Calculate Santiago’s pension adjustment reversal for 2020.
Case 5 Roy Carswell has worked for his current employer since 2018. His employer
provides a defined benefit pension plan which, until 2020, provided a benefit of 1.3
percent of pensionable earnings for each year of service. Roy was admitted to the
plan with full vesting as of 2018. His 2018 pensionable earnings were $58,000, with a
corresponding figure for 2019 of $62,000.
As the result of negotiations with Roy’s union, as of January 1, 2020, the benefit has
been increased to 1.5 percent of pensionable earnings. The change will be applied
retroactively for all prior years of service.
Required: Calculate Roy’s 2020 past service pension adjustment.


(Excess RRSP Contributions vs. TFSA)
At the beginning of 2019, Deeta Oldham had unused RRSP deduction room of $35,000. Her
account also contained an undeducted contribution of $37,000. She made the contribution just
before she was fired from her high paying job in 2018 because a video of her physically abusing
her assistant was posted to YouTube.
As she remained unemployed during 2019 and had little taxable income, she does not make any
RRSP deduction during 2019. During 2019, Deeta withdrew a total of $25,000 from her RRSP in order
to cover her living expenses. She had no earned income for RRSP purposes in either 2018 or 2019.
At the beginning of 2020, Deeta finally finds employment at a fitness boot camp, resulting in her
having a 2020 earned income for RRSP purposes of $61,000. She is also fortunate in that she
wins $225,000 in the provincial lottery. Because she now has excess funds, on May 2, 2020,
she deposits $40,000 in her RRSP.
Deeta’s wealthy grandmother is gravely ill and Deeta expects to inherit a substantial sum on her
death. On December 15, 2020, Deeta meets with you to discuss tax planning. In preliminary
discussions, you find she does not have a TFSA.
Required:
A. Determine Deeta’s maximum RRSP deduction for 2020.
B. Determine the ITA 204.1 penalty (excess RRSP contributions), if any, that would be assessed
to Deeta for the year ending December 31, 2020.
C. What advice would you give to Deeta about her RRSP and TFSA contributions?

(RRSP Contributions)
During 2019 and 2020, Mr. Donald Barnes has the following income, loss and withholdings data:
2020 2019
Gross Salary $57,000 $55,000
Taxable Benefits 1,250 1,150
CPP Contributions ( 2,898) ( 2,749)
EI Premiums ( 856) ( 860)
Union Dues ( 175) ( 175)
Profit From Tax Advisory Service 12,220 4,150
Net Loss From Rental Property ( 6,480) ( 11,875)
Spousal Support Received From Former Wife 2,400 2,400
Taxable Dividends (Grossed Up Amount) 2,900 3,210
Interest On Government Bonds 2,110 3,640
At the end of 2019, Mr. Barnes had no Unused RRSP Deduction Room and no undeducted RRSP
contributions.
Required: For 2020, determine Mr. Barnes’ maximum allowable deduction for contributions to
a Registered Retirement Savings Plan under the following assumptions:
A. During 2019 and 2020, Mr. Barnes is not a member of a Registered Pension Plan or a
Deferred Profit Sharing Plan.
B. Mr. Barnes is a member of a Registered Pension Plan. His employer reports that his Pension
Adjustment is $4,200 for 2019 and $4,300 for 2020, all of which reflects contributions made
by his employer.


During 2019, Ms. Storm is employed in Vernon by a large public company. The employer spon-
sors a defined contribution pension plan and, during 2019, the company made contributions
onMs. Storm’s behalf of $2,500. Ms. Storm made amatching contribution of $2,500.
At the end of 2019, Ms. Storm had unused deduction room of $17,000 and undeducted contribu-
tions of $8,000.
During 2019, Ms. Storm has the following income and loss data:
Salary $86,200
Taxable Benefits From Employer 5,600
Union Dues ( 450)
Net Loss From Mail Order Business ( 4,500)
Net Rental Income 6,700
Common-Law Partner Support Paid ( 12,000)
Eligible Dividends Received 2,850
Interest On Savings Account 850
Required: Calculate the maximum deductible RRSP contribution that can be made by Ms.
Storm for 2019.

Prior to 2017, Ms. Sherly Sam had no Earned Income for RRSP purposes. In 2017 and 2018, she
had sufficient Earned Income to allow for maximum allowable RRSP deductions in 2018 and
2019. However, she did not make any contributions in either of those years.
Sherly has been employed by a Canadian public corporation since 2018. The following informa-
tion pertains to her income over the past two years:
2020 2019
Salary Before Benefits $150,000 $150,000
Automobile Benefit 7,000 6,500
Employee Stock Option Benefit 4,000 3,000
Benefit On Interest Free Loan 2,000 1,500
Registered Pension Plan Contributions ( 4,500) ( 5,000)
Deductible Employment Expenses ( 3,200) ( 3,400)
Interest Income 2,200 2,100
Taxable Capital Gains 14,500 6,300
Net Business Income (Note 1) 21,300 14,600
Royalty Income (Note 2) 6,400 6,600
Net Rental Loss ( 5,000) ( 10,000)
Spousal Support Payments Received 24,000 24,000
Eligible Dividends 1,400 1,500
Totals $220,100 $197,700
Note 1 The business income is from a mail order business that Sherly runs out of her
home.
Note 2 The royalty income is from a manual that she wrote on how to write instruction
manuals.

Sherly participates in her employer’s money purchase Registered Pension Plan. Her employer
contributes twice the amount contributed by each employee to the plan. Her Pension Adjust-
ment for 2019 is $15,000.
Required: Ignore all GST considerations.

A. Calculate Sherly’s Earned Income for the purpose of determining her maximum 2020 RRSP
contribution by listing the items and amounts that would be included in her Earned Income.
List separately the items that are not included in the Earned Income calculation.
B. Calculate Sherly’s maximum deductible RRSP contribution for 2020.

(Comprehensive Employment Income With RRSP - Plus Death Of Registrant)
Mr. Frank Sabatini has been a salesman for a large, publicly traded Canadian corporation for the
last 15 years. During the year ending December 31, 2020, he earned a base salary of $58,000
and commissions of $74,000. In addition, the corporation reimbursed him for invoiced travel
costs of $12,300. Included in these travel costs were $5,600 in expenditures for meals while
travelling and entertainment of clients.
Other Information:
1. The corporation made a number of deductions from Mr. Sabatini’s salary. The amounts were
as follows:
Canada Pension Plan contributions $ 2,898
Employment Insurance premiums 856
Income taxes 39,000
Registered Pension Plan contributions 3,500
Contributions to a registered charity 600
Parking fees - company garage 240
Employee share of life insurance premium (See item #2) 1,500
Employee share of sickness and accident
insurance premium (See item #3) 550
2. Mr. Sabatini is covered by a group life insurance policy that pays $150,000 in the event of his
death. The total annual premium on this policy is $3,000, with one-half of this amount paid
by the employer.
3. Mr. Sabatini is covered by a group sickness and accident insurance plan that he joined on
January 1, 2020. The premium on this plan is $100 per month, one-half of which is paid
by Mr. Sabatini’s employer. The plan provides periodic benefits that compensate for lost
employment income. During 2020, Mr. Sabatini was hospitalized during all of November and
received a benefit from the sickness and accident insurance plan in the amount of $4,500.
Payment of the monthly premium was waived during the one month period of disability.
4. Mr. Sabatini’s employer provides him with an automobile that was purchased in 2019 for
$68,000. During 2020 Mr. Sabatini drives this automobile 99,000 kilometers, 92,000 of
which are employment related. All operating costs, amounting to $16,200 for 2020, are
paid by the employer. During the period of his hospitalization, his employer required that the
vehicle be returned to the company garage. Mr. Sabatini pays the company $1,000 for his
personal use of the automobile during 2020.
5. As a result of his extensive employment related travel, Mr. Sabatini has accumulated over
300,000 points in a frequent flier program. All of Mr. Sabatini’s travel costs have been charged
to his personal credit card and his employer has reimbursed him for all of these charges.

On December 30, 2020, he uses 150,000 of these points for two first class tickets to
Cancun. Mr. Sabatini is accompanied on this one week trip by his secretary and, while there
is some discussion of business matters, the trip is primarily for pleasure. At the same time,
Mr. Sabatini uses another 30,000 of the points to provide his wife with an airline ticket to
visit her mother in Leamington, Ontario. The normal cost of the Cancun tickets is $11,000,
while the normal cost of the Leamington ticket is $600.
6. In 2017, Mr. Sabatini received options to purchase 1,000 shares of his employer’s stock at a
price of $12.50 per share. At the time the options were granted, the shares were trading at
$10.00 per share. During December, 2020, Mr. Sabatini exercises these options. At the time
of exercise, the stock is trading at $23.50 per share.
7. Mr. Sabatini’s employer allows him to purchase merchandise at a discount of 30 percent
off the normal retail prices. During 2020, Mr. Sabatini acquires such merchandise at a cost
(after the applicable discount) of $6,790.
8. In addition to reimbursing him for invoiced travel costs, Mr. Sabatini’s employer pays a
$5,000 annual fee for his membership in a local golf and country club. During 2020, Mr.
Sabatini spends $6,800 entertaining clients at this club. None of these costs are reimbursed
by Mr. Sabatini’s employer.
9. Mr. Sabatini’s employer contributes $2,400 to the company’s Registered Pension Plan on
his behalf and, in addition, contributes $2,000 in his name to the company’s Deferred Profit
Sharing Plan.
10. Mr. Sabatini has correctly calculated that his employment income added $116,000 to his
2019 Earned Income for RRSP purposes. This Earned Income figure has not taken into con-
sideration the following items:
2020 2019
Business Loss ($ 3,300) ($12,500)
Taxable Dividends (After Gross Up) 600 800
Interest Income 1,100 660
Rental Income 2,000 7,500
Child Support Received
(For 8 Year Old Son) 6,000 6,000
11. Mr. Sabatini’s Unused RRSP Deduction Room carried forward from 2019 was nil and he had
no undeducted RRSP contributions. His employer reports that his Pension Adjustment for
2019 was $6,800.
12. On May 18, 2020, Mr. Sabatini contributes $2,600 to his wife’s RRSP. His only contribution
to his own RRSP in 2020 and 2020 was $10,000 in February, 2020. This contribution was
deducted in full on his 2019 tax return.
13. In July, 2021, Mr. Sabatini drowns in his swimming pool. The police found receipts for the
Cancun trip with his secretary floating beside him in the pool.
Required:
A. Determine Mr. Sabatini’s minimum net employment income for the year ending December
31, 2020, and indicate the reasons that you have not included items in your calculations.
Ignore GST implications.
B. Calculate Mr. Sabatini’s RRSP Deduction Limit for 2020 and determine his RRSP deduction
in the calculation of his Net Income For Tax Purposes for 2020.
C. Assume that Mr. Sabatini’s RRSP does not specify a beneficiary if he dies. Describe the tax
consequences of his death on his RRSP.

D. Assume Mr. Sabatini’s wife is the sole beneficiary of his RRSP. Describe the tax conse-
quences of his death on his RRSP.

(RRSPs, TFSAs And Tax Planning)
Ms. Janine Wheeler found a position in retail sales in September, 2019. During the remainder
of that year, she had gross employment income of $22,000. Prior to 2019, Ms. Wheeler had no
Earned Income and made no contributions to either an RRSP or a TFSA.
Prior to July, 2019, Ms. Wheeler had been supported by and living with her common-law partner.
On June 30, they formally separate and sign a document which providesMs. Wheeler with a
lump-sum payment of $80,000, plus $1,200 per month in spousal support. The lump-sum pay-
ment was deposited in a savings account which earned interest of $550 during the remainder
of 2019. She receives six months of support payments in 2019.
Janine did not contribute to an RRSP during 2019. However, her employer sponsored an RPP
to which Janine contributed $1,200 during 2019. This contribution was matched by a $1,200
contribution by Janine’s employer.
In addition to her employment income and interest income, Janine had the following other
sources of income during 2019:
• Dividends from Canadian public companies of $900.
• A net business loss of $2,500 from her new web-based photos on canvas service.
• An inheritance from an uncle of $250,000.
For 2019, Ms.Wheeler’s income places her in the lowest federal income tax bracket. Further,
she anticipates that her 2020 income will also be taxed at this rate. However, she has been
promised a management position beginning in January, 2021. This position involves a significant
increase in salary and this, combined with her increasingly profitable web-based business, will
result in her being in the 26 percent federal income tax bracket.
Required:
A. Calculate Ms. Wheeler’s net employment income for 2019.
B. Determine Ms. Wheeler’s maximum deductible RRSP contribution for 2020.
C. As Ms.Wheeler’s personal financial consultant, what advice would you give her regarding
her TFSA and RRSP contribution and deduction for 2020?

(Net Income With RRSP Contributions)
During 2019, Mr. Jeff Singer has the following amounts of income and deductions that will be
used in calculating his Net Income For Tax Purposes:
Net Employment Income Jeff’s net employment income was $59,000. This included
commissions of $12,000 and taxable benefits of $6,000. It was after deductions which
totaled $8,000. This $8,000 amount included contributions to the employer’s RPP
of $1,500. The employer made a matching contribution of $1,500 and, in addition,
contributed $1,000 to a deferred profit sharing plan on Jeff’s behalf.

Property Income Jeff’s property income was made up of interest of $2,300, eligible
dividends received of $1,400, and royalties of $5,000. The royalties were on a software
application that he developed in a previous year. He also had a net rental loss of $27,200.
Capital Gains And Losses During 2019, Jeff had taxable capital gains of $62,000 and
allowable capital losses of $6,000. In the determination of his 2019 Taxable Income, he
deducted a net capital loss carry forward of $56,000 [(1/2)($112,000)].
Other Income And Deductions During 2019, Jeff received $12,000 in spousal
support payments from his first wife. As he has custody of his 14 year old son from
this marriage, he also receives $11,000 in child support payments. In addition, Jeff paid
$24,000 in spousal support payments to his second wife. As he has decided to remain
single for the rest of his life, he has deductible child care costs during 2019 of $5,000.
Jeff has $18,000 in unused deduction room and $20,000 in undeducted contributions at
the end of 2019, but Jeff did not make an RRSP deduction in 2019. This is as the result
of advice from his brother, who read on an investing blog that this would protect him if
his RRSP investments lost value.
Required:
A. Calculate Jeff’s 2019 Net Income For Tax Purposes.
B. Based on the information provided, calculate:
• the maximum RRSP contribution that Jeff can make for 2020 without incurring a penalty;
• Jeff’s maximum RRSP deduction for 2020 and any remaining undeducted contributions,
assuming he makes the maximum contribution that you have calculated.
C. Assume that, in addition to the information provided in the problem, Jeff has 2019 net busi-
ness income of $175,000. Using this new information, provide the information required in
Part B.

(Employment Compensation Tax Planning)
Mr. Jones is 62 years old and his wife, Mabel, is 58 years old. Mabel has no income of her own
as she spends most of her waking hours maintaining her supernatural phenomena blog.
In January, 2020, he agreed to undertake a special project for the Martin Manufacturing Com-
pany, a company that produces large industrial use motors. The project is expected to take three
years to complete. Mr. Jones was previously employed by the Martin Manufacturing Company
for 11 years from 1985 to 1995. However, since then, he has operated his own consulting orga-
nization in Windsor.
Accepting the special project for the Martin Manufacturing Company will require that Mr. Jones
discontinue his consulting operation and move to Hamilton, where the head offices of the Com-
pany are located. This does not concern Mr. Jones as he plans to retire in three years under
any circumstances. It will, however, require that he sell his home in Windsor and acquire a new
residence in Hamilton. Mr. Jones anticipates that he will require a mortgage of approximately
$100,000 in order to purchase a residence.
Mr. Jones and the Company have agreed to a salary of $100,000 per year for the three year
period, with no additional benefits other than the required payments for Employment Insur-
ance and the Canada Pension Plan. However, the Company has indicated that it is prepared to
be flexible with respect to the type of compensation that is given to Mr. Jones, subject to the
condition that the total cost of providing the compensation does not exceed $300,000 over the
three year period.
The Martin Manufacturing Company is a Canadian public company and is subject to a combined
federal and provincial tax rate of 30 percent. It currently has a Registered Pension Plan for its
employees. However, this plan was not in place during the earlier 11 year period in which Mr.
Jones was employed by the Company.
Mr. Jones has other income and is concerned about the fact that his $100,000 per year salary
will attract high levels of taxation. He is seeking your advice with respect to how his compensa-
tion arrangement with the Martin Manufacturing Company might be altered to provide some
reduction or deferral of taxes. He indicates that, subsequent to retirement, his income is likely
to be less than $60,000 per year.
Required: Advise Mr. Jones with respect to alternative forms of compensation that could
reduce or defer taxes on the $300,000 that he is to receive from the Martin Manufacturing
Company.

Ms. Kerri Sosteric is 33 years of age. She is divorced from her former husband and has custody of
the two children from that marriage. Her son Barry is 5 years old and her daughter Kim is 8 years
old. Neither of her children have any income during 2020.
The terms of Kerri’s 2018 divorce decree require that her former husband pay $1,500 per month
in child support and an additional $500 per month in spousal support. During 2019 and 2020, all
amounts were paid in a timely fashion.
Because she works on a full time basis, Kerri sends her children to a commercially operated day
care centre. During 2020, the cost of this care was $8,600. The day care centre provides receipts
for this amount.
During 2020, medical expenses for Kerri and her family are as follows:
Kerri $ 560
Barry 240
Kim 1,820
Total $2,620
Kerri is employed by a large public company. Employment related information for the years 2019
and 2020 is as follows:
2019 2020
Gross Salary $47,000 $53,000
Commissions 6,200 7,800
Canada Pension Plan Contributions 2,749 2,898
Employment Insurance Premiums 860 856
RPP Contributions (Note) 1,800 1,950
Note Kerri’s employer makes a matching contribution to the money purchase RPP in
each of the two years.
Other than the RPP contributions, Kerri’s employer provides no other benefits. In addition, she is
required to maintain an office in her home with no reimbursement provided. Her employer p rovides

the required T2200 form. Kerri’s home had cost $420,000 on January 1, 2019, with $120,000 of
this amount being the estimated value of the land. For 2019 and 2020, the total costs of owning
and operating this home are as follows:
2019 2020
Utilities And Maintenance $ 1,850 $ 2,040
Insurance 625 715
Property Taxes 4,200 4,400
Mortgage Interest 12,000 11,800
Kerri’s home office occupies 15 percent of the total floor space in the home.
In January, 2019, Kerri acquires a residential duplex that she uses as a rental property. The cost of
the property is $340,000, with $80,000 of this amount being the estimated value for the land. For
the two years 2019 and 2020 rents and expenses other than CCA are as follows:
2019 2020
Rents $ 8,400 $13,800
Expenses Other Than CCA 10,300 11,100
In January, 2019, Kerri acquired 5,000 shares of her employer’s stock at its fair market value of
$12.00 per share. During 2019, these shares paid eligible dividends of $0.75 per share. During
2020, she receives eligible dividends of $0.60 per share. During December, 2020, Kerri sells all of
her shares at their fair market value of $14.75 per share.
Kerri has unused RRSP deduction room carried forward from 2019 of $6,200. In addition, her plan
contains $5,800 in undeducted contributions. Based on the undeducted contributions in the plan,
along with any additional contributions required to meet this goal, Kerri would like to deduct an
amount in 2020 that would reduce her unused RRSP deduction room to nil at the end of the year.
Required: Ignore GST/HST/PST considerations.

A. Calculate the additional contribution Ms. Sosteric must make to her RRSP.
B. Assume that Ms. Sosteric contributes the amount calculated in Part A to her RRSP. Calculate
Ms. Sosteric’s 2020 minimum:
• Net Income For Tax Purposes,
• Taxable Income, and
• federal Tax Payable before consideration of any income tax that would have been with-
held or paid in instalments.

At the beginning of 2020, Mr. Ahmed Sidi is 71 years old and has been retired for 5 years. Prior
to his retirement, he had been a long-term employee of a large public company. During 2020,
he receives payments from the employer’s RPP of $86,000. Both the employee and employer
contributions to this RPP ended when Mr. Sidi retired.
In addition to the pension income from his employer’s RPP, in 2020, Ahmed is entitled to $11,000
in Canada Pension Plan benefits. When Ahmed first began to receive CPP benefits, he elected
to split these benefits with his wife, Adrianna.
Because his income is consistently in excess of $150,000 per year, he has not applied for and
does not receive OAS payments.

Ahmed has a 45 year old son who has been blind since birth. The son lives with Ahmed and has
no income of his own.
Ahmed’s wife Adrianna has provided all of the care required for their son. She is 66 years old at
the beginning of the year and, during 2020, she received OAS payments of $7,400 in addition to
the $5,500 in CPP benefits that Ahmed has elected to split with her. She has no other personal
source of income. However, for 2020, Ahmed will split all of his qualifying pension income with
Adrianna.
The family’s medical expenses are as follows:
Ahmed $ 2,500
Adrianna 3,100
Son 9,800
Total $15,400
Ahmed makes an annual donation to the Canadian National Institute For The Blind of $4,000.
While he was still employed, he was granted options to acquire 5,000 shares of his employer’s
stock. The option price was $15 per share and, at the time the options were granted, this was
also the fair market value of his employer’s shares. All of these options were exercised in Febru-
ary, 2020. At this time, the shares were trading at $21 per share. In November, 2020, all of the
shares are sold for $23 per share.
Ahmed had other investment income during 2020 as follows:
Interest From Canadian Sources $18,000
Foreign Source Interest (Net Of 10 Percent Withholding)* 2,700
Total $22,900
*Assume that the foreign tax credit is equal to the amount withheld.
On January 1, 2020, Ahmed owns three residential rental properties. They are all Class 1 proper-
ties. Relevant information on these properties is as follows:
Property A Property B Property C

Capital Cost - Building $560,000 $685,000 $426,000
UCC On January 1 422,000 571,000 $385,000
Rental Revenues 34,000 42,000 26,000
Expenses (Other Than CCA) 29,000 37,000 23,000
On December 31, 2020, property A is sold for $960,000. The value of the land for this property
was $100,000 at the time of purchase and had increased to $340,000 at the time of sale. The
vendor pays $96,000 in cash, with Ahmed taking back a mortgage for the $864,000 balance. The
mortgage requires annual payments of $86,400 on the principal, beginning in 2021.
When he turned 71 in 2019, Ahmed transferred his RRSP assets into a RRIF. On January 1, 2020,
the fair market value of these assets is $1,250,000. As he has little need for current income,
Ahmed would like to minimize his withdrawals from the plan.
At the beginning of 2020, Ahmed opens an RRSP with his wife as the registrant. He has no
unused RRSP deduction room carried forward from 2019. He would like to make the maximum
deductible contribution to his wife’s RRSP during 2020. In calculating this amount, assume that
his 2019 earned income is equal to his 2020 earned income.

Required: Ignore GST/HST/PST considerations.

A. Calculate Mr. Sidi’s maximum deductible spousal RRSP contribution for 2020.
B. Assume that Mr. Sidi contributes the amount calculated in Part A to his wife’s RRSP. Calcu-
late Mr. Sidi’s 2020 minimum:
• federal Tax Payable before consideration of any income tax that would have been with-
held or paid in instalments.
C. In general terms, without doing calculations, describe the factors that Mr. Sidi should con-
sider when deciding how much pension income he should split with his spouse.

SSS Problem Ten–1

SSS Problem Ten–1

(Calculation Of PAs, PSPAs, And PARs)
Each of the following independent Cases involves calculations of the Pension Adjustment (PA),
Past Service Pension Adjustment (PSPA), or Pension Adjustment Reversal (PAR) that would be
reported by the employer.
Case A Barbra Stressand has worked for her current employer since 2017. In January
2020, this employer implements a defined benefit RPP. The benefits of the plan are
extended to all years of service prior to the inception of the plan. The plan provides a
benefit equal to .75 percent of pensionable earnings for each year of service. Barbra’s
pensionable earnings in prior years were as follows:
2017 $46,000
2018 49,000
2019 54,000
2020 55,000
Required: Calculate Barbra’s 2020 PSPA and PA.
Case B Jane Fisher’s employer sponsors both a defined contribution RPP and a DPSP.
Jane is a member of both plans. During 2020, on Jane’s behalf, her employer contributes
$3,300 to the RPP and $1,500 to the DPSP. Jane contributes $2,400 to the RPP.
Required: Calculate Jane’s 2020 PA.
Case C Mark Lanvin begins working for LTC Ltd. at the beginning of 2018. LTC sponsors
a defined benefit RPP with benefits that do not become vested until after an employee has
been with the corporation for five years. LTC has reported the following PAs for Mark:
2018 $4,500
2019 4,800
On January 1, 2020, Mark is offered a better position with a competing corporation and
resigns at LTC Ltd.
Required: Calculate Mark’s PAR for 2020.
Case D Victor Fortune’s employer sponsors a defined benefit RPP. During 2020, Victor
and his employer make matching contributions of $2,500 each. The plan provides a benefit
of 1.3 percent of pensionable earnings for each year of service. Victor has 2020
pensionable earnings of $41,000.
Required: Calculate Victor’s 2020 PA.
Case E Martin Davis has worked for his current employer since 2018. He has been a
member of his employer’s defined benefit RPP since his employment began. His
pensionable earnings were $62,000 in 2018 and $65,000 in 2019. Because of worsening
economic conditions in his employer’s industry, the employees have agreed to have the
benefit formula reduced from 1.5 percent of pensionable earnings for each year of service,
to 1.3 percent of pensionable earnings for each year of service. The change will be applied
retroactively for all prior years of service.
Required: Calculate Martin’s 2020 PSPA.

SSS Problem Ten–3
SSS Problem Ten–2

(Excess RRSP Contributions)
On December 1, 2019, Mary Jo Bush, on the advice of her hairdresser, deposited her inheritance of
$54,000 in her RRSP. She had made no RRSP contributions prior to this. Because she had very
little Taxable Income in 2019, she did not deduct any portion of her RRSP contribution in that year.
She has provided you with the following information:
• Her Unused RRSP Deduction Room is $10,000 at the end of 2019.
• She made an additional RRSP contribution of $5,000 on February 1, 2020.
• Mary Jo withdraws $35,000 from the RRSP on December 1, 2020.
• For 2020, the annual increase in Mary Jo’s RRSP Deduction Limit is $9,000 (18 percent of her
2019 Earned Income of $50,000).
Required: Determine the ITA 204.1 penalty (excess RRSP contributions), if any, that would be
assessed to Mary Jo for the year ending December 31, 2020.
SSS Problem Ten–3

Carla Goodman has been employed by Army Brake Products (ABP), a Canadian controlled private
corporation, since 2018. The following information pertains to her income over the past two years:
2020 2019
Salary Before Benefits $120,000 $120,000
Employee Stock Option Benefit 8,000 5,000
Benefit On Interest Free Loan 6,000 5,000
Registered Pension Plan Contributions ( 4,000) ( 3,000)
Deductible Employment Expenses ( 4,500) ( 4,000)
Interest Income 1,800 1,600
Business Income 34,000 35,000
Royalty Income 7,000 5,000
Rental Loss ( 5,000) ( 10,000)
Spousal Support Payments ( 15,000) ( 12,000)
Non-Eligible Dividends On ABP Stock 900 1,000
Totals $164,200 $153,600
The royalty income listed above is 2 percent of the sales of the “Handy Shopper,” a gadget Ms.
Goodman invented three years ago. The business income listed above is earned from selling
leather goods.
Ms. Goodman had no Earned Income for RRSP purposes prior to 2017. While in 2017 and 2018,
she had sufficient Earned Income to enable her to deduct the maximum allowable RRSP
contribution for 2018 and 2019, she made no RRSP contributions in either of these years.
Beginning in 2019, Ms. Goodman participates in ABP’s employee money purchase Registered
Pension Plan. ABP contributes twice the amount contributed by an employee to the plan. Her
Pension Adjustment for 2019 is $9,000.

SSS Problem Ten–5
Required Ignore all GST considerations.

A. Calculate Ms. Goodman’s Earned Income for the purpose of determining her maximum 2020
RRSP contribution by listing the items and amounts that would be included in her Earned
Income. List separately the items that are not included in the Earned Income calculation.
B. Calculate Ms. Goodman’s maximum deductible RRSP contribution for 2020.
SSS Problem Ten–4

(Net Income With RRSP)
During 2019 Ms. Alexis Akerfeldt had the following amounts of income and deductions under the
various subdivisions of Division B of the Income Tax Act:
Taxable Capital Gains 10,300
Allowable Capital Losses ( 12,300)
Subdivision E Deductions (Moving Expenses) ( 3,000)
At the end of 2019, Ms. Akerfeldt’s Unused RRSP Deduction Room was $6,000. There were no
undeducted contributions in her RRSP account.
Required:
A. Calculate Ms. Akerfeldt’s 2019 Net Income For Tax Purposes and any carry overs available to
her.
B. Calculate the maximum deductible contribution Ms. Akerfeldt can make to her RRSP for the
2020 taxation year for the following independent Cases:
Case 1 During 2019, she is a member of a money purchase Registered Pension Plan
(RPP) in which she has contributed $2,000 and her employer has contributed $2,500.
Case 2 During 2019, she is a member of a Deferred Profit Sharing Plan (DPSP) in which
her employer contributed $3,500 per employee.
Case 3 During 2019, she is not a member of an RPP or DPSP. Assume that in addition to
the preceding information, she also has net business income of $165,000. She has
contributed $1,500 to her husband’s RRSP in August 2020.
SSS Problem Ten–5

Mrs. Rhonda Sorenson is 44 years old and lives in Waterloo, Ontario. She is married to Martin
Sorenson and they have one child. Martin is currently unemployed and his only 2020 income is
$8,400 in Employment Insurance benefits.
Their 19 year old daughter, Cissy, is in full time attendance at the University Of Waterloo for
eight months during 2020. Ms. Sorenson pays Cissy’s 2020 tuition of $7,800 and, because Cissy’s
2020 income is only $6,500, she agrees to transfer to her mother the maximum tuition credit.
Other Information:
1. Mrs. Sorenson is employed by a large publicly traded company, earning a gross salary of
$67,000 in 2020. In addition, she received commissions of $3,150. During 2020, her employer
withheld the following amounts from her salary:

SSS Problem Ten–5
Canada Pension Plan Contributions $2,898

Donations To United Way 600
Professional Dues 350
Contribution To Disability Insurance Plan 1,000
Rhonda’s employer makes a matching contribution of $2,750 to her RPP, as well as a matching
contribution of $1,000 to her disability insurance plan. The plan provides periodic benefits that
compensate for lost employment income. Mrs. Sorenson began contributing to the disability
insurance plan in 2019. Her contribution in that year was $900.
2. Mrs. Sorenson’s employer provides her with a car that was purchased in 2019 for $45,200. The
car was used by Mrs. Sorenson throughout the year, except for a period of one month during
which she was hospitalized for a nervous disorder. During this one month period, she was
required to return the car to the company garage.
During 2020, the car was driven a total of 62,000 kilometres, of which 51,000 were employment
related. Her employer paid all of the operating costs which totaled $9,300 for 2020.
3. Her employer reimburses 100 percent of her airline tickets and meals, but only a portion of her
lodging costs. As a result, she has unreimbursed employment related travel costs. For 2020,
these totaled $4,200.
She is required to maintain an office in her home without reimbursement from her employer.
Her employer provides the required T2200 form. Based on the portion of her house that is used
for this office, the related costs are as follows:
Utilities And Maintenance $ 850
Insurance 725
Mortgage Interest 960
4. During her one month hospitalization, Mrs. Sorenson received disability insurance benefits of
$4,800.
5. During 2020 Mrs. Sorenson earned interest on term deposits of $3,200. In addition, she
received eligible dividends of $1,500.
6. On May 1, 2020, Mrs. Sorenson sold a piece of land for $143,000, receiving a down payment
of $43,000 in cash. The remaining balance will be paid in five annual instalments in the years
2021 through 2025. The adjusted cost base of the land was $87,000.
7. The family medical expenses were as follows:

Rhonda $ 1,200
Martin 2,750
Cissy 8,395
Total $12,345
8. In 2019, Mrs. Sorenson’s had Net Income For Tax Purposes of $57,525. This was made up of
net employment income of $55,000 (after the deduction of $2,400 of RPP contributions), a net
business loss of $8,600, interest income of $2,000, grossed up dividends of $3,525, and
royalties on a song she wrote eight years ago of $5,600.
9. At the end of 2019, Mrs. Sorenson’s Unused RRSP Deduction Room was $7,400 and she had
no undeducted RRSP contributions. Her employer reported that she had a 2019 Pension
Adjustment of $5,200.

SSS Problem Ten–5
Required: Ignore GST considerations.

A. Calculate Mrs. Sorenson’s maximum deductible RRSP contribution for 2020.
B. Assume that Mrs. Sorenson contributes the amount calculated in Part A to her RRSP.
Calculate Mrs. Sorenson’s 2020 minimum:
• Federal Tax Payable before consideration of any income tax that would have been
withheld or paid in instalments.

Solution to SSS Problem Ten–1

Case A
The required PSPA would be calculated as follows:
2017 Amount [(.75%)(9)($46,000)] $ 3,105.00
2018 Amount [(.75%)(9)($49,000)] 3,307.50
2019 Amount [(.75%)(9)($54,000)] 3,645.00
2020 PSPA $10,057.50
In addition to the PSPA calculated above, there would be a 2020 PA of $3,712.50

[(.75%)(9)($55,000)].
Case B
The required 2020 PA would be calculated as follows:
Employer’s Contribution To RPP $3,300
Employer’s Contribution To DPSP 1,500
Jane’s Contribution To RPP 2,400
PA $7,200
Case C
The required PAR would be calculated as follows:
2018 PA $4,500
2019 PA 4,800
2020 PAR $9,300
Case D
The required 2020 PA would be calculated as follows:
[(1.3%)(9)($41,000)] = $4,797
Note that the contributions made during 2020 have no influence on the PA for a defined benefit
RPP.
Case E
The required PSPA would be calculated as follows:
2018 Amount [(1.5% - 1.3%)(9)($62,000)] $1,116
2019 Amount [(1.5% - 1.3%)(9)($65,000)] 1,170
2020 PSPA (Reduction In Benefits) $2,286
Note that, in this case, the PSPA involves a reduction in benefits. This means that it would be
added rather than deducted in the calculation of the RRSP Deduction Limit.
There would also be a 2020 PA. However, this cannot be calculated as the problem does not
provide the 2020 pensionable earnings.


The excess RRSP contributions amount at the end of each month of 2020 would be calculated as
follows:
March To
January February November December
Undeducted Contributions
At Beginning Of Month $54,000 $54,000 $59,000 $59,000
Add: 2020 Contribution 5,000
Deduct: 2020 Withdrawal ( 35,000)
Undeducted Contributions
At End Of Month $54,000 $59,000 $59,000 $24,000
Deduct: Unused Deduction
Room Carried Forward ( 10,000) ( 10,000) ( 10,000) ( 10,000)
Deduct: 2020 Increase In
Unused Deduction Room ( 9,000) ( 9,000) ( 9,000) ( 9,000)
Deduct: $2,000 Cushion ( 2,000) ( 2,000) ( 2,000) ( 2,000)
Monthly Cumulative Excess $33,000 $38,000 $38,000 $ 3,000
Penalty At 1 Percent Per Month $ 330 $ 380 $ 380 $ 30
The total penalty for 2020 is $4,160 [($330)(1) + ($380)(9 + 1) + ($30)(1)].

If the $35,000 excess contributions are withdrawn from the RRSP prior to the end of the year
following the year in which an assessment is received for the year in which the contribution is
made, an offsetting deduction is available.

Part A
For purposes of determining her maximum 2020 RRSP contribution, 2019 Earned Income would be
Net Employment Income*

Salary $120,000
Employee Stock Option Benefit 5,000
Benefit On Interest Free Loan 5,000
Deductible Employment Expenses ( 4,000) $126,000
Business Income 35,000
Royalty Income (Own Invention) 5,000
Spousal Support Payments ( 12,000)
Earned Income $144,000
*Note that, in calculating Earned Income for RRSP purposes, no deduction is made from
net employment income for contributions made to an RPP.

A listing of the items that are not included in the calculation of Earned Income is as follows:
• Registered Pension Plan Contributions
• Interest Income
• Taxable Capital Gains
• Non-Eligible Dividends
Part B
The calculation of Ms. Goodman’s maximum deductible RRSP contribution for 2020 is as follows:
2018 RRSP Dollar Limit $26,230

2019 RRSP Dollar Limit 26,500
Opening Unused RRSP Deduction Room $52,730
Annual Addition - Lesser Of:
• 2020 RRSP Dollar Limit = $27,230
• 18 Percent Of 2019 Earned Income
[(18%)($144,000)] = $25,920 25,920
2019 PA ( 9,000)
Maximum Deductible RRSP Contribution For 2020 $69,650

Part A
Ms. Akerfeldt’s Net Income For Tax Purposes would be calculated as follows:
Income From Property
[($8,000)(138%)] 11,040 $82,040
Allowable Capital Losses (Maximum) ( 12,300) Nil
Deductions Under ITA 3(d):
Ms. Akerfeldt’s Net Income For Tax Purposes is $61,040 and she has a net capital loss carry over
of $2,000 ($12,300 - $10,300).
Part B - Case 1
Ms. Akerfeldt’s 2019 Earned Income would be calculated as follows:
Add Back RPP Contributions 2,000

Given this, her maximum deductible RRSP contribution would be calculated as follows:
Unused Deduction Room - End Of 2019 $ 6,000
• 18% of 2019 Earned Income Of $55,000 = $9,900 9,900
Less 2019 PA ($2,000 + $2,500) ( 4,500)
Maximum Deductible RRSP Contribution $11,400
Part B - Case 2
Less 2019 PA ( 3,500)
Part B - Case 3
Net Employment Income $ 71,000
Business Income 165,000
Less 2019 PA NIL
2020 RRSP Deduction Limit $33,230
Less 2020 Contribution to Spousal RRSP ( 1,500)


Part A - RRSP Contribution
In order to determine Mrs. Sorenson’s maximum RRSP deduction for 2020, we need to calculate
her Earned Income for 2019. The calculation is as follows:
Net Business Loss ( 8,600)
Royalties 5,600
2019 Earned Income $54,400
Given the preceding calculation, her maximum deductible RRSP contribution for 2020 is as follows:
• 18% Of 2019 Earned Income Of $54,400 = $9,792 9,792
Less 2019 PA ( 5,200)
Part B
Net Employment Income
Mrs. Sorenson’s net employment income for the year would be calculated as follows:
Gross Salary $67,000
Commission Income 3,150
Registered Pension Plan Contributions ( 2,750)
Professional Dues ( 350)
Taxable Car Benefit (Note One) 8,948
Employment Expenses (Note Two) ( 5,050)
Disability Insurance Benefits (Note Three) 2,900
Note One The taxable benefit on the car would be calculated as follows:
Standby Charge [(2%)(11)($45,200)][11,000 ÷ 18,337] $5,965
• [(11,000)($0.28)] = $3,080
• [(1/2)($5,965)] = $2,983 2,983
Total Benefit $8,948
As Mrs. Sorenson’s employment-related driving is more than 50 percent of the total,

she is eligible for the reduced standby charge calculation. This also means that she is
eligible to use the alternative operating cost benefit calculation based on one-half the
standby charge. In this case, this approach does not produce the lower operating cost
benefit and is not used.
Note Two Mrs. Sorenson can deduct home office costs of $850 in utilities and main-
tenance under ITA 8(1)(i), which is available to all employees. However, under 8(1)(f),
she could also deduct insurance and property taxes. The non-reimbursed travel costs

can be deducted under either provision. As discussed in Chapter 3, she cannot use
both ITA 8(1)(f) and ITA 8(1)(h).
The amounts available under the two provisions are as follows:
Home Office Costs - Utilities And Maintenance 850
Home Office Costs - Insurance 725
Home Office Costs - Property Taxes 1,340
Non-Reimbursed Travel Costs 4,200
Available Under ITA 8(1)(f) $7,115
Non-Reimbursed Travel Costs 4,200

Home Office Costs - Utilities And Maintenance 850
Available Under ITA 8(1)(f) and (i) $5,050
Unfortunately, the deduction under ITA 8(1)(f) is limited to her commission income of
$3,150. Given this, she is better off deducting the $5,050 that is available under ITA
8(1)(f) and (i).
Note Three As her employer contributes to the disability insurance plan, the $4,800
in benefits received must be included in income. However, this can be reduced by the
cumulative contributions that she has made to this plan. These total $1,900 ($1,000 +
$900), leaving a net income inclusion of $2,900 ($4,800 - $1,900).
Property Income
Mrs. Sorenson’s property income would be calculated as follows:
Interest Income $3,200
Eligible Dividends 1,500
Gross Up [(38%)($1,500)] 570
Total Property Income $5,270
Taxable Capital Gains

Mrs. Sorenson’s sale of land resulted in a capital gain of $56,000 ($143,000 - $87,000). However,
as the total proceeds were not collected in the year of sale, she can reduce her income inclusion
through the use of a reserve.
Total Capital Gain $56,000
Reserve - Lesser Of:
• [($56,000)($100,000 ÷ $143,000)] = $39,161
• [($56,000)(20%)(4 - 0)] = $44,800 ( 39,161)
Remaining Gain $16,839
Inclusion Rate 1/2


Mrs. Sorenson’s Net Income For Tax Purposes would be calculated as follows:
Employment Income (See Preceding Calculations) $73,848
Property Income 5,270
Taxable Capital Gain 8,420
RRSP Deduction (Part A) ( 11,992)
Deductible CPP ($2,898 - $2,798) ( 166)
Taxable Income
As Mrs. Sorenson has no deductions applicable to the determination of Taxable Income, her
Taxable Income is equal to her Net Income For Tax Purposes.
Tax Payable
Tax On First $48,535 $ 7,280
Tax Credits:
Spousal ($13,229 - $8,400) ( 4,829)
Employment Insurance ( 856)
Canada Pension Plan ( 2,732)
Transfer Of Cissy’s Tuition - Lesser Of:
• Absolute Limit Of $5,000
• Actual Tuition Of $7,800 ( 5,000)
Medical Expenses (Note Four) ( 9,889)
Rate 15% (5,667)
Charitable Donations (Note Five)
[(15%)($200) + (29%)($600 - $200)] (146)
Dividend Tax Credit On Eligible Dividends [(6/11)($570)] (311)
Note Four The credit base for medical expenses would be calculated as follows:
Rhonda And Martin’s Expenses ($1,200 + $2,750) $3,950
Lesser Of:
• [(3%)($75,380)] = $2,261
Subtotal $1,689
Cissy’s Medical Expenses $8,395
• $2,397
• [(3%)($6,500)] = $195 ( 195) 8,200
Base For Credit $9,889
Note Five As none of her income is taxed at 33 percent, this rate will not be
applicable to the calculation of the charitable donations tax credit.

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Self Study And SSS Problems For Chapters 1 to 10

Canadian Tax Principles - Self Study And SSS Problems (2020/2021)

Chapter 1 Self Study Problems

SOLUTION available in Study Guide

Self Study Problem One - 2

Required: Discuss Mr. Right’s proposed flat rate tax system.

SOLUTION available in Study Guide

Self Study Problem One - 3

Canadian Tax Principles - Self Study And SSS Problems (2020/2021)

SOLUTION available in Study Guide

Self Study Problem One - 4

SOLUTION available in Study Guide

Self-Study Problem One - 5

SOLUTION available in Study Guide

Canadian Tax Principles - Self Study And SSS Problems (2020/2021)

Self Study Problem One - 6

SOLUTION available in Study Guide

Self Study Problem One - 7

SOLUTION available in Study Guide

Self Study Problem One - 8

Canadian Tax Principles - Self Study And SSS Problems (2020/2021)

SOLUTION available in Study Guide

Self Study Problem One - 9

SOLUTION available in Study Guide

Self Study Problem One - 10

Canadian Tax Principles - Self Study And SSS Problems (2020/2021)

SOLUTION available in Study Guide

Self-Study Problem One - 11

SOLUTION available in Study Guide

Canadian Tax Principles - Self Study And SSS Problems (2020/2021)

Self Study Problem One - 12

SOLUTION available in Study Guide

Self Study Problem One - 13

SOLUTION available in Study Guide

Self Study Problem One - 14

Canadian Tax Principles - Self Study And SSS Problems (2020/2021)

SOLUTION available in Study Guide

Self-Study Problem One - 15

SOLUTION available in Study Guide

Canadian Tax Principles - Self Study And SSS Problems (2020/2021)

Chapter 1 Supplementary Self Study Problems

SSS Problem One–1

SSS Problem One–2

Canadian Tax Principles - Self Study And SSS Problems (2020/2021)

B. Ms. Gloria Salinas is a Canadian citizen who, on November 1, 2020, is appointed as

SSS Problem One–3

Canadian Tax Principles - Self Study And SSS Problems (2020/2021)

SSS Problem One–4

SSS Problem One–5

Canadian Tax Principles - Self Study And SSS Problems (2020/2021)

Chapter 1 Solutions to Supplementary Self Study Problems

Solution to SSS Problem One–1

Solution to SSS Problem One–2

Canadian Tax Principles - Self Study And SSS Problems (2020/2021)

Solution to SSS Problem One–3

Canadian Tax Principles - Self Study And SSS Problems (2020/2021)

Solution to SSS Problem One–4

Income Under ITA 3(a):

Canadian Tax Principles - Self Study And SSS Problems (2020/2021)

Solution to SSS Problem One–5

Canadian Tax Principles - Self Study And SSS Problems (2020/2021)

Canadian Tax Principles - Self Study And SSS Problems (2020/2021)