Attached is BTAX1 Case Study (the big one!

) The case study is on or before 12:00 midnight on

Monday, April 13, 2020. Please send your solution to me as an attachment via e-mail and
include a Word document showing any calculations for amounts that are not obvious by looking
at the tax return. I would strongly recommend that you do this test in a group – it takes
approximately 12 hours to complete – so share the workload. There is no maximum limit on the
size of your group. Remember to include the names of each member of your group when you e-
mail me your file.

If you would like me to review your first draft and provide you with feedback and hints please
make sure that you send me your file no later than 12:00 midnight on Monday, April 6, 2020.

PLEASE remember to check and clear the Diagnostics before

sending me your first draft!

Note: you will need to use either the CANTAX software or the Profile software to prepare this
solution because these are the only tax software programs that I have installed on my computer.
Page 1 of 10 BTAX1 - CASE STUDY Michelle Paquin

(100 marks) Winter 2020

Michelle Paquin has brought to you the information for her 2018 personal income tax return and
has asked you to prepare the return for her, free of charge of course . After sorting through the
various information slips, receipts and other paraphernalia, you have compiled the following
details:

(1) GENERAL INFORMATION:

Social Insurance Number (self): 287-822-799

Social Insurance Number (spouse): 264-565-787

Address: 303 McEwen Drive

Kingston, Ontario
K7M 3W2

Address on previous year's return: 102 Mountainview Drive

Vancouver, British Columbia
V3S 4W2

Date of Birth: December 24, 1969

(well, I am lying about my age!)

Date of move: January 2, 2018

(2) DETAILS OF DEPENDENTS:

(a) Name: Dave

Relationship: Husband
Date of Birth: December 13, 1967 (wishful thinking!)
During 2018, he attended Queen’s University full-time for 8 months (30
weeks), the tuition fees for which were $6,500.

Net income: Refer to “Details of Investment Income”

(b) Name: Simba

Relationship: Daughter
Date of Birth: January 19, 2014

Net Income: -0-

Page 2 of 10 BTAX1 - CASE STUDY

(2) DETAILS OF DEPENDENTS (continued):

(c) Name: Sara

Relationship: Daughter
Date of Birth: August 4, 2003
Net Income: -0-

(c) Name: Diana

Relationship: Daughter
Date of birth: September 15, 2000
Net income: -0-

(d) Name: Christa

Relationship: Daughter
SIN: 888-777-999
Date of Birth: July 31, 1999
Net Income: Gross earnings $ 3,500.00
E.I. premiums 58.10

AND refer to "Details of Investment Income"

During 2018, Christa attended the University of Toronto on a full-time basis

for 8 months, the tuition fees for which were $6,500. (T2202A)

(e) Name: Wayne

Relationship: Uncle
SIN: 222-333-444
Date of Birth: July 31, 1924 (Just for the record, this is not his actual year of birth!)
Net Income: See item 8(a) - Details of Other Income
`
When you prepare Wayne’s tax return you will notice that the software
will automatically include the Old Age Security benefits on his return and
so it should!

Wayne is mentally infirm. He marked just one too many Business Law
test papers during his teaching years…….

He is completely dependent on his niece.

Page 3 of 10 BTAX1 - CASE STUDY

(3) DETAILS OF EMPLOYMENT INCOME:

(a) On January 2, 2018, Michelle was transferred from Vancouver to Kingston by her
employer to accept a position as sales manager with CGA Limited. She was employed
there until March 31, 2018. Details of the 2018 T4 were as follows:

Gross earnings $ 12,500.00 box (14)

C.P.P. contributions 445.50 box (16)
E.I. premiums 207.50 box (18)
R.P.P. contributions 625.00 box (20)
Income tax withheld 4,750.00 box (22)
Pension adjustment 1,250.00 box (52)

Michelle was required by the terms of her employment contract to provide her own
vehicle for business use. She leased a car for the three-month period at a cost of $950 per
month. This amount excludes insurance and HST. She drove the car a total of 9,000
kilometers of which 7,200 kilometers were for business use. Michelle paid the total
operating costs in the amount of $950. CGA Limited paid her a vehicle allowance of
$ .65 per kilometer driven for business use.

(b) On April 1, 2018, Michelle left her employment with CGA Limited to accept a position
as salesperson with SLC Incorporated, until August 31, 2018. Details of the 2018 T4
were as follows:

Gross earnings $ 20,800.00 box (14)

Commissions (included in gross earnings) 3,000.00 box (42)
C.P.P. contributions 856.35 box (16)
E.I. premiums 345.28 box (18)
Income tax withheld 7,900.00 box (22)

As a condition of her employment with SLC Incorporated, Michelle was required to

travel out of town for and pay the related expenses. She is also required to provide her
own vehicle for business use. The company paid her a travel allowance in the amount of
$1,800 and a vehicle allowance of $ .25 per kilometer driven for business use. The
actual travel costs paid by Michelle were as follows:

Accommodations (not luxury accommodations!) $ 2,000

Train fares 650
Meals, while out of town 1,000
Page 4 of 10 BTAX1 - CASE STUDY

(3) DETAILS OF EMPLOYMENT INCOME (continued):

She also paid the following additional expenses to earn commissions:

Entertainment of clients (not part of out-of-town travel costs) $ 1,200

Advertising 1,550
Office supplies 285

Michelle continued to lease the vehicle she had been using while employed by CGA
Limited. She also paid the total operating costs incurred from April 1, 2018 to August
31, 2018 in the amount of $1,150.00. Michelle drove the vehicle a total of 10,000
kilometers from April 1, 2018 to August 31, 2018 of which 7,500 kilometers were for
business use.

On August 31, 2018, she cancelled the lease contract on this vehicle.

So – obviously you will need to add some taxable benefits to Michelle’s employment earnings
due to the fact that taxable benefits that were not included on her T4s. What you will need to do
to enter these taxable benefits is to go to the applicable T4 screen, scroll down to the bottom and
you will find a line (no box number) that reads “Other Employment Income not included on
T4/T4A slips”. This is where you will input the total taxable benefits that were not included on
her T4 slips.
Page 5 of 10 BTAX1 - CASE STUDY

(4) DETAILS OF RENTAL INCOME:

Michelle owns rental properties. The information relating to these properties for the year ended
December 31, 2018 is as follows:

Building 1 Building 2 Building 3

Class 3 Class 3 Class 1

Capital cost $ 80,000 $ 55,000 $ 100,000

UCC @ Dec.31, 2017 $ 60,000 $ 42,000 $ 100,000

Gross rents $ 8,000 $ 11,000 $ 19,000

Disbursements
Mortgage interest $ 5,200 $ 4,500 $ 6,200
Mortgage principal 3,000 2,500 3,300
Property taxes 1,200 900 2,500
Insurance 1,800 2,000 3,200
Repairs and maintenance 5,800 5,600 4,100

On October 1, 2018, Michelle sold Building #2 and the land, for total proceeds of $62,500.
Information regarding Building #2 is as follows:

Year of Capital Appraisal

Purchase Cost Values

Land 1987 $ 10,000 $ 15,000

Building 1987 55,000 60,000
$ 65,000 $ 75,000

I realize that the amounts for cost and selling price for Building #2 are unrealistically low –
but just go with the data given!
Page 6 of 10 BTAX1 - CASE STUDY

(5) DETAILS OF INVESTMENT INCOME (continued):

(a) Eligible dividends received from taxable Canadian public corporations:

DuPont of Canada $ 1,500 (actual amount)

Mitel Inc. 800 (actual amount)
CTC Limited 1,200 (actual amount)
Bell Canada Inc. 625 (actual amount)

On September 15, 2018, Michelle transferred 200 shares of her holdings in CTC Limited
to her husband, Dave and 200 shares to her daughter, Christa. Michelle owned 750
shares on this date, at which time the Fair Market Value was $30 per share. The shares
were acquired as follows:

February 2, 2017 purchased 200 shares @ $18 per share

December 15, 2017 sold 50 shares @ $16 per share
January 5, 2018 purchased 150 shares @ $20 per share
April 30, 2018 purchased 300 shares @ $25 per share
June 15, 2018 purchased 150 shares @ $28 per share

The actual amount of total dividends received on the shares subsequent to the date of
transfer was $500 ($250 by Dave and $250 by Christa). These amounts are not included
in the $1,200 listed above. It is up to you to determine the best way to deal with the
transfer of the shares to Dave!

Michelle also received $2,000 in dividends paid from the Capital Dividend Account of
I.M. Canadian Limited, a Canadian-controlled private corporation.

(b) On June 1, 2017, Michelle had purchased a 5-year G.I.C. in the amount of $5,000 at an
interest rate of 5% (no T5 was received).

(c) During 2018, Michelle received dividends from Amgen Inc., a U.S. corporation. The
actual amount of dividends received after withholding taxes were deducted at a rate of
15%, was $800 in U.S. currency. (Remember to select the US average exchange rate).

(d) Michelle paid the following amounts in 2018:

Investment counsel fees $ 275

Safety deposit box rental $ 25
Page 7 of 10 BTAX1 - CASE STUDY

(6) DETAILS OF DISPOSITION OF CAPITAL PROPERTIES:

(a) Refer to "Details of Rental Income" for disposition of Building #2 and the Land.

(b) Refer to "Details of Investment Income" for the shares transferred to Dave and
Christa.

(c) During 2018, Michelle sold two paintings from her collection of artwork. One painting
which was originally purchased in 2014 at a cost of $900 sold for proceeds of $2,500.
The other painting, which was purchased in 2017 at a cost of $1,200, sold for proceeds of
$800.

(7) DETAILS OF INCOME FROM SELF-EMPLOYMENT:

On August 31, 2018, Michelle left her employment with SLC Incorporated. On September 1,
2018 she opened her own business, a retail operation, selling candy. The name of her business is
"Dragon Lady’s Delightful Delicacies". This business is HST registered and therefore all
amounts do not include HST collected/paid, unless otherwise stated.

Details of operations for the first 4 months (122 days) ended December 31, 2018, were as
follows:

Sales (Note 1) $ 500,000

Purchases 350,000
Ending inventory (Note 2) 25,500
Accounting and legal fees (Note 3) 3,000
Advertising and Promotion (Note 4) 12,000
Insurance (Note 5) 1,200
Interest and bank charges 1,250
Business taxes and licenses 800
Office expenses 700
Travel Expenses (Note 6) 11,050
Rent Expense (Note 7) 25,000
Employees wages and benefits (Note 8) 46,000
Automobile expenses (Note 9) 3,795
Conventions (Note 10) 8,000
Charitable donations (United Way) 500
Page 8 of 10 BTAX1 - CASE STUDY

(7) DETAILS OF INCOME FROM SELF-EMPLOYMENT (continued):

NOTES:

(1) In December of 2018, a customer purchased a large quantity of red licorice and peanut M &
M’s for a total sale price of $10,000 (included in the total sales figure for the year). The cost
of this candy was $7,000 (included in the total purchases figure for the year). The customer
will pay for this purchase on an instalment basis over a three-year period. The first
instalment of $1,000 was received in December 2018.

(2) The inventory was valued at the lower of Cost or Market. However, on December 31, 2018,
Michelle arbitrarily reduced the closing inventory by $500 to create a “special reserve”. (??)

(3) Accounting and legal fees include an amount of $200 paid for the preparation of Michelle’s
2017 personal income tax return.

(4) Advertising and promotion includes expenditures for entertainment of suppliers and
customers in the amount of $1,600.

(5) Insurance includes life insurance premiums in the amount of $200 paid on a policy for
Michelle for which her husband is the beneficiary.

(6) Travel expenses include all of the travel expenses paid to one employee who does the buying
for the business: The vehicle allowance was not included on the employee’s T4.

Automobile allowance - $ .60 per km x 15,000 kilometers $ 9,000

Meals consumed while out of town 680
Accommodations 1,370
$ 11,050

(7) Michelle operates her business from a store in a major shopping mall. The lease commenced
on September 1, 2018 and is for a 5-year period. [Note: “rent expense” does NOT include
the cost of the leasehold improvements referred to on the next page!]

(8) Wages and benefits include withdrawals made by Michelle in the amount of $10,000.
Page 9 of 10 BTAX1 - CASE STUDY

(7) DETAILS OF INCOME FROM SELF-EMPLOYMENT (continued):

NOTES (continued):

(9) Automobile expenses include the following:

Interest paid on loan to purchase vehicle #1 (62 days) $ 660
Gas, oil, maintenance, insurance, license – vehicle #1 940
Interest paid on loan to purchase vehicle #2 (61 days) 670
Gas, oil, maintenance, insurance, license – vehicle #2 1,525
$ 3,795

Vehicle #1 was purchased on September 1, 2018 at a cost of $38,000 (includes HST).

Michelle drove this vehicle a total 8,000 kilometers, of which 75% was for business use.
Michelle decided that it would be in the best interest of the business to offer free delivery
service. On November 1, 2018 the business disposed of this vehicle for proceeds of
$20,000 and purchased a van (vehicle #2) at a cost of $45,200 (includes HST). The van
is to be used only for deliveries (100% business use).

(10) Michelle attended three conventions in 2018 in relation to the business. The costs
incurred for these conventions were as follows:

Convention #1 - Cost $ 2,000

- Meals 500
$ 2,500

Convention #2 – Cost including meals for four days $ 4,000

Convention #3 - Cost $ 1,200

- Meals 300
$ 1,500

Additional information:

(a) Cost of leasehold improvements (Sept. 1, 2018) $ 20,000

(b) Cost of cash register (Sept. 1, 2018) $ 2,680
(c) Cost of computer - 100% business use (Sept. 1, 2018)
- Hardware $ 4,500
- Systems software 500
- Applications software 750
Page 10 of 10 BTAX1 - CASE STUDY

(8) DETAILS OF OTHER INCOME AND DISBURSEMENTS:

(a) At the end of 2017, Michelle’s aunt (Wayne’s youngest sister) passed away, just prior to
her retirement. In 2018, Michelle and Wayne, being the only surviving family members,
received death benefits from her employer. Wayne received $8,000 and Michelle
received $5,000.

(b) During 2018, Michelle received $4,200 in child support payments from her ex-husband.
This amount was received pursuant to the divorce agreement, dated March 1, 2001.

(c) Moving expenses paid in 2018:

Real Estate commissions on sale of house in Vancouver $7,500
Legal fees - purchase of house in Kingston 950
Airfares 3,000
Moving company costs 5,000
* Hotels (18 days @ $150 per day) 2,700
* Food (18 days @ $ 75 per day) 1,350

* Michelle and her family were unable to move into their house in Kingston, until
January 20, 2018 due to major renovations and repairs that had to be done to make
the house habitable.

(d) Child-care expenses paid for Simba to the "Kingston Toddlers" day-care centre were
$5,500 for 2018.

(e) RRSP contributions made on February 27, 2019 $7,000

Michelle’s earned income for 2017 was $50,000 and her 2017 T4 indicated a pension
adjustment in the amount of $5,000. Michelle had no unused RRSP contributions from
2017. Her unused RRSP contribution room at the end of 2017 was $1,500.

(f) Federal political contributions made in 2018 $ 500

(g) Michelle attended St. Lawrence College from September to December of 2018 on a part-
time basis and took one course, the tuition fees for which were $350.00 (T2202A)

(h) Michelle had returned to university a few years ago on a full-time basis, for which she
is still repaying a Canada Student loan. Interest paid on this loan in 2018 was $2,875.

That’s all!!!!