You are on page 1of 18

# CHAPTER THIRTEEN SOLUTIONS

## Solution to Assignment Problem Thirteen - 1

Part A Mr. Sparks’ Net Income For Tax Purposes would be calculated as follows:
Income Under ITA 3(a):
Net Employment Income \$60,000
Income From Property 6,000 \$66,000
Income Under ITA 3(b):
Taxable Capital Gains \$7,500
Allowable Capital Losses (Maximum) ( 7,500) Nil
Balance From ITA 3(a) And (b) \$66,000
Subdivision e Deductions ( 3,000)
Balance From ITA 3(c) \$63,000
Deductions Under ITA 3(d):
Business Loss ( 16,000)
Net Income For Tax Purposes (Division B Income) \$47,000

Mr. Sparks’ Net Income For Tax Purposes is \$47,000 and he has a net capital loss carry over of \$3,000.

Part B His maximum deductible Registered Retirement Savings Plan contribution in each Case would be
calculated as follows:

Case 1 Note that as his \$60,000 net employment income has already been reduced by his \$1,000 RPP
contribution, \$1,000 is added back to calculate his Earned Income.
Unused Deduction Room - End of 2006 Nil
Increase In RRSP Deduction Limit:
Lesser of:
• 2007 RRSP dollar limit = \$19,000
• 18% of 2006 Earned Income of \$45,000
(\$60,000 + \$1,000 - \$16,000) = \$8,100 \$8,100
Less 2006 PA (\$1,000 + \$1,500) ( 2,500)
Maximum Deductible RRSP Contribution \$5,600

Case 2
Unused Deduction Room - End of 2006 Nil
Increase In RRSP Deduction Limit:
Lesser of:
• 2007 RRSP dollar limit = \$19,000
• 18% of 2006 Earned Income of \$44,000
(\$60,000 - \$16,000) = \$7,920 \$7,920
Less 2006 PA ( 1,500)
Maximum Deductible RRSP Contribution \$6,420
Case 3
Unused Deduction Room - End of 2006 Nil
Increase In RRSP Deduction Limit:
Lesser of:
• 2007 RRSP dollar limit = \$19,000
• 18% of 2006 Earned Income of \$184,000
(\$60,000 - \$16,000 + \$140,000) = \$33,120 \$19,000
Less 2006 PA Nil
2007 RRSP Deduction Limit \$19,000
Less 2007 Contribution to Spousal RRSP ( 1,500)
Maximum Deductible RRSP Contribution \$17,500
Solution to Assignment Problem Thirteen - 2
Part A Donald’s maximum 2007 RRSP deduction will include the lesser of \$19,000 and 18 percent of his
2006 Earned Income. This latter figure is calculated as follows:

## Gross Salary \$40,000

Commissions 20,000
Employment Expenses ( 3,000)
Taxable Benefit On Loan 2,750
Net Rental Loss ( 2,500)
Spousal Support Received 2,400
Spousal Support Paid ( 3,500)
Royalties (Note) Nil
Earned Income \$56,150
Percent 18%
Annual Addition (Less Than \$19,000) \$10,107

Note Royalties received due to someone else’s work are not part of Earned Income for RRSP
purposes.

## Opening Unused RRSP Deduction Room \$25,000

2006 Pension Adjustment [(2)(\$1,400)] ( 2,800)
RRSP Deduction Limit For 2007 \$32,307

The Pension Adjustment is equal to the sum of the employee and employer contributions to his RPP.

Part B The appropriate advice at the end of 2007 would be to contribute enough to make the maximum
2007 deduction, plus the allowed overcontribution of \$2,000. This amount would be calculated as follows:

## RRSP Deduction Limit For 2007 \$32,307

Non-Penalty Excess 2,000
Undeducted 2004 Contribution ( 7,500)
Maximum Non-Penalty Contribution For 2007 \$26,807

Contributions in excess of this amount would, if made prior to the end of 2007, attract a penalty of 1
percent per month.
Solution to Assignment Problem Thirteen - 3
Note For agreements made after April, 1997, child support payments are not deductible. This point is
covered in Chapter 11.

Part A Mrs. Goh’s 2007 RRSP Deduction Limit would be calculated as follows:
Opening Unused Deduction Room \$ 6,200
Annual Addition (Note 1) 15,291
Pension Adjustment (Note 2) ( 5,700)
RRSP Deduction Limit For 2007 \$16,421

Note 1 The annual addition for 2007 would be the lesser of \$19,000 and 18 percent of Earned
Income for 2006. The latter amount would be calculated as follows:
Salary \$98,000
Group Term Life Insurance Benefit 850
Spousal Support Paid [(12)(\$200)] ( 2,400)
Loss On Rental Property ( 8,000)
2006 Earned Income \$88,450
Rate 18%
Annual Addition (Less Than \$19,000) \$15,921

## Items Not Included In Calculations

• The cost of the dental plan is not a taxable benefit.
• RPP contributions are not deducted from employment income in calculating Earned Income for
RRSP purposes.
• Interest on term deposits is not part of Earned Income for RRSP purposes.
• Taxable capital gains are not part of Earned Income for RRSP purposes.
• Royalties on someone else’s invention are not part of Earned Income for RRSP purposes.
Note 2 The Pension Adjustment of \$5,700 would be equal to the sum of the employee and
employer contributions to her RPP (\$3,200 + \$2,500).

Part B Mrs. Goh’s maximum contribution that would not attract the penalty for excess contributions would
be calculated as follows:
RRSP Deduction Limit For 2007 \$16,421
Non-Penalty Excess 2,000
Undeducted Contributions From Previous Years ( 5,500)
Maximum Non-Penalty Contribution For 2007 \$ 12,921
Part C The advantages of making her 2007 contributions to a spousal RRSP can be described as follows:
Income Splitting As her spouse has no other source of income, the spousal RRSP would put
income in his name, which would be taxed at a lower rate when it is received by Mrs. Goh’s
husband.
Pension Tax Credit As her spouse does not appear to have any potential pension income, the use
of a spousal RRSP would create such income, allowing her spouse to eventually take advantage of
the pension tax credit.
Note that these advantages could also be achieved through the use of the new provisions which
allow for the splitting of pension income. (See Chapter 11.)
Solution to Assignment Problem Thirteen - 4
Part A Mr. Sabatini’s minimum net employment income would be calculated as follows:

Salary \$ 58,000
Commissions 74,000
Registered Pension Plan Contributions (Note 1) ( 3,500)
Net Disability Benefits (Note 2) 3,950
Life Insurance Premium Taxable Benefit
[(50%)(\$3,000)] 1,500
Automobile Benefit (Note 3) 6,251
Airline Travel Benefit (\$11,000 + \$600) 11,600
Stock Option Benefit (Note 4) 11,000
Entertainment Costs [(50%)(\$6,800)] ( 3,400)
Net Employment Income \$159,401

Note 1 RRSP contributions are not deductible in the determination of net employment income.
The contributions made by the employer to the RPP and the Deferred Profit Sharing Plan affect
Mr. Sabatini’s Pension Adjustment, but do not create a taxable benefit.

Note 2 As Mr. Sabatini’s employer has made contributions to the sickness and accident plan, the
benefit of \$4,500 is taxable. This is reduced by the payments of \$550 [(\$100)(12 - 1)/2] that were
made by Mr. Sabatini during the year, leaving a net benefit of \$3,950.

Note 3 With respect to the standby charge, Mr. Sabatini’s employment related usage is over 50
percent of the total and, as a consequence, he can reduce his standby charge to the extent of
personal usage that is less than 1,667 kilometers per month. Also note that, as the car was not
available during June, his standby charge would be based on 335 days of availability. This would
be rounded to 11 months (335/30). Given this, the standby charge would be as follows:
[(\$68,000)(11 Months)(2%)(7,000/18,337)] = \$5,711
As Mr. Sabatini’s employment related use was over 50 percent of the total use, he could base his
operating cost benefit on one-half of the standby charge. However, a lower benefit results from
the regular \$0.22 per kilometer calculation as follows:
Operating Cost Benefit [(\$0.22)(7,000)] = \$1,540
Given these two calculations, and the \$1,000 payment that Mr. Sabatini made to his employer, the
total automobile benefit is \$6,251 (\$5,711 + \$1,540 - \$1,000).

Note 4 As Mr. Sabatini made no election to defer the income inclusion related to the stocks
purchased with the stock options during the year, a taxable benefit will arise. It is calculated as
follows:
Stock Option Benefit [(\$23.50 - \$12.50)(1,000 Shares)] = \$11,000
As is covered in Chapter 5, while not part of the calculation of net employment income, there will
be an ITA 110(1)(d) deduction from Taxable Income equal to \$5,500, or one-half of the \$11,000
benefit.
Other Notes
• The travel costs that the corporation reimbursed to Mr. Sabatini have no tax effect.
• The CPP and EI contributions are not deductible. They can be used to create credits against Tax
Payable.
• Income taxes withheld are not deductible.
• Donations to a registered charity will create a credit against Tax Payable, but cannot be deducted in the
determination of net employment income.
• Parking fees related to Mr. Sabatini’s normal employment location are not deductible.
• The discounts on merchandise provided by the employer are not a taxable benefit.
• Only 50 percent of the country club entertainment costs can be deducted by Mr. Sabatini, assuming he
has a signed T2200. The \$5,000 membership fee would not be a taxable benefit, but would not be
deductible by his employer.

Part B Mr. Sabatini’s maximum deductible RRSP contribution would be calculated as follows:

## Unused Deduction Room - End of 2006 Nil

Lesser of:
• 2007 RRSP dollar limit = \$19,000
• 18% of 2006 Earned Income of \$111,000 = \$19,980 \$19,000
Less 2006 PA ( 6,800)
2007 RRSP Deduction Limit \$12,200
Less 2007 Contribution to Spousal RRSP ( 2,600)
Maximum Deductible RRSP Contribution \$ 9,600

His \$10,000 contribution to his own RRSP is not relevant as it was deducted in the previous year.
Solution to Assignment Problem Thirteen - 5
The excess RRSP contributions amount at the end of each month of 2007 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: 2007 Contribution 5,000
Deduct: 2007 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: 2007 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

## The total penalty for 2007 is \$4,160 [(\$330)(1) + (\$380)(10) + (\$30)(1)].

Solution to Assignment Problem Thirteen - 6
If Mr. White accepts his employer’s offer of cash, he has two alternative courses of action. First, he can do
nothing, in which case the full \$68,000 will be an addition to his Net Income For Tax Purposes for the
current year. His second alternative will be to transfer some part of the payment to a Registered Retirement
Savings Plan (RRSP) on a tax free basis. While he will still have to include the full \$68,000 in his income,
he will be eligible for a deduction equal to a specified amount of such transfers.
The rules prior to 1989 permit tax free transfers of up to \$2,000 per year of service with the employer who
is making the payments, plus an additional \$1,500 per year of service for each year during which the
employer was not making vested contributions to either a Registered Pension Plan or a Deferred Profit
Sharing Plan. For 1989 through 1995, the amount of this transfer is limited to \$2,000 per year of post-1988
service. For service after 1995, the transfer is no longer available.
In 2007, Mr. White’s limit would be \$31,500 [(5 years)(\$3,500) + (7 years)(\$2,000)]. The excess of
\$36,500 (\$68,000 - \$31,500) will be taxed in the year in which it is received.
As to the appropriate course of action, it depends on Mr. White’s circumstances. If he anticipates finding
another job within a short period of time and has no immediate need for the additional cash, the tax free
transfer to an RRSP is probably the most appropriate course of action. He could use the excess retiring
allowance to make his maximum regular RRSP contribution. In addition, he could make a non-deductible
contribution of up to \$2,000 without being assessed any penalty.
On the other hand, if he wishes to take some time off, or is uncertain as to his future job prospects, he may
wish to retain all of the cash on a personal basis. Note, however, if the offer is accepted late in the year
after Mr. White has received most of his annual income, the retention of the additional \$68,000 would
likely push Mr. White well into the highest tax bracket. This could be avoided by putting the maximum of
\$31,500 into an RRSP, with funds withdrawn as needed in the following year.
Another possibility is that Mr. White is at or near retirement age. If this is the case, he will probably wish
to transfer the maximum of \$31,500 to an RRSP in order to gain flexibility in terms of when the income
will be taxed during his retirement years.
If the funds are subsequently withdrawn in the form of an annuity or transferred to a RRIF, the payments
will be eligible for the pension income tax credit after Mr. White reaches age 65. The payments will also
be eligible for the new pension income splitting provisions. (See Chapter 11.)
As a final note, if Mr. White chooses to make a tax free transfer to an RRSP, the transaction does not
change his RRSP Deduction Limit for the year. That is, the maximum deductible RRSP contribution for
2007 will be the same, whether or not he transfers part of the retiring allowance into his plan.
Solution to Assignment Problem Thirteen - 7

## Case A The required 2006 PA would be calculated as follows:

Employer’s Contribution To RPP \$2,200
Employer’s Contribution To DPSP 1,500
Mrs. Anderson’s Contribution To RPP 1,800
PA \$5,500

## Case B The required 2006 PA would be calculated as follows:

[(9)(1.75%)(\$45,000)] = \$7,087.50

Note that the contributions made during 2006 have no influence on the PA for a defined benefit RPP.

## The 2007 PA will reflect the benefits earned during 2007.

Case D Ms. Dexter’s 2007 PSPA is based on the PAs that would have been reported in the relevant years,
less the PAs actually reported. The calculation would be as follows:

## The 2007 PA will reflect the benefits earned during 2007.

Solution to Assignment Problem Thirteen - 8
Part A - Earned Income For purposes of determining her maximum 2007 RRSP contribution, 2006
Earned Income would be calculated as follows:

## Net Employment Income*

Salary \$100,000
Employee Stock Option Benefit 5,000
Benefit On Interest Free Loan 5,000
Deductible Employment Expenses ( 4,000) \$106,000
Royalty Income (Own Invention) 5,000
Rental Loss (10,000)
Spousal Support Payments (12,000)
2006 Earned Income \$124,000

*
Note that, in calculating Earned Income for RRSP purposes, no deduction is made from net
employment income for contributions made to an RPP.

As per the requirement of the problem, 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
Note that if there had been a stock option deduction from Taxable Income, it would not have affected
Earned Income.

Part B The calculation of Ms. Goodman’s maximum allowable RRSP deduction for 2007 begins with the
determination of her unused deduction room at the end of 2006. As she has made no contributions to either
an RRSP or an RPP in years prior to 2006 and no contribution to an RRSP in 2006, her unused deduction
room at the end of 2006 would be the RRSP Dollar Limit for the years 2005 and 2006:

2005 \$16,500
2006 18,000
Unused RRSP Deduction Room \$34,500

To this amount we would add \$19,000, the lesser of the 2007 RRSP Dollar Limit of \$19,000 and \$22,320
(18 percent of Ms. Goodman’s 2006 Earned Income). From this total we would subtract Ms. Goodman’s
2006 PA of \$9,000.
These calculations can be summarized as follows:

## Opening Unused RRSP Deduction Room \$34,500

2007 RRSP Dollar Limit 19,000
2006 PA ( 9,000)
Maximum Deductible RRSP Contribution For 2007 \$44,500
Solution to Assignment Case Thirteen - 1
Part A In order to determine his maximum RRSP deduction for 2007, we need to calculate his Earned
Income for 2006. The calculation is as follows:
Net Employment Income \$77,000
Registered Pension Plan Contributions 3,200
Net Rental Loss ( 9,000)
Business Loss ( 5,000)
2006 Earned Income \$66,200

Given the preceding calculation, his maximum deductible RRSP contribution for 2007 is as follows:
Unused Deduction Room - End Of 2006 \$ 3,400
Lesser Of:
• 2007 RRSP Dollar Limit = \$19,000
• 18% Of 2006 Earned Income Of \$66,200 = \$11,916 11,916
Less 2006 PA ( 6,400)
Maximum Deductible RRSP Contribution \$ 8,916

Part B Mr. Sali’s net employment income for the year would be calculated as follows:
Gross Salary \$76,000
Commission Income 2,800
Registered Pension Plan Contributions ( 3,500)
Union Dues ( 360)
Miami Aeroplan Miles Ticket 625
Taxable Car Benefit (Note One) 5,391
Employment Expenses (Note Two) ( 4,300)
Net Employment Income \$76,656

Note One: The taxable benefit on the car would be calculated as follows:
Standby Charge {[(2/3)(12)(\$642)(11/12)][14,000 ÷ (11)(1,667)]} \$3,594
Operating Cost Benefit - Lesser Of:
• [(14,000)(\$0.22)] = \$3,080
• [(1/2)(\$3,594)] = \$1,797 1,797
Total Benefit \$5,391

As Mr. Sali’s employment related driving is more than 50 percent of the total, he is eligible for the
reduced standby charge calculation. This also means that he is eligible to use the alternative
operating cost benefit calculation based on one-half the standby charge. In this example, this
approach produces the lower operating cost benefit.

Note Two As Mr. Sali has commission income, he has a choice of deducting his expenses under a
combination of ITA 8(1)(f), (i), and (j) or, alternatively under a combination of ITA 8(1)(h), (i),
and (j). As discussed in the text, he cannot use both ITA 8(1)(f) and ITA 8(1)(h).
Under either case he can deduct \$600 for utilities and maintenance under ITA(i) and (j).
Deductions under ITA 8(1)(f) are limited to the amount of commissions earned. With respect to
home office costs, under ITA 8(1)(f) he could deduct the insurance and property taxes, a total of
\$2,100 (\$900 + \$1,200). However, when this is added to the non-reimbursed travel costs, the total
deduction would be \$5,800 (\$2,100 + \$3,700). He cannot deduct \$3,000 of this amount under ITA
8(1)(f) as it exceeds his commission income of \$2,800.
Alternatively, traveling costs can be deducted under ITA 8(1)(h). Deductions under this provision
are not limited to commission income. If he deducts under ITA 8(1)(h), he cannot deduct the
insurance and property taxes, but his \$3,700 in non-reimbursed travel costs is fully deductible as it
is not limited to commissions. This would be the better choice and would result in deductible
employment expenses of \$4,300 (\$600 + \$3,700).
Note that an employee cannot deduct mortgage interest as a home office cost under any of the ITA
8 provisions.

Note Three The parking fees at the company’s garage are not deductible. The Edmonton trip is
not a taxable benefit as it is employment related.

Net Income For Tax Purposes Mr. Sali’s 2007 Net Income For Tax Purposes would be calculated as
follows:
Employment Income (See Preceding Calculations) \$76,656
Taxable Capital Gains (Given) 6,200
Net Rental Loss (Given) ( 3,900)
Net Business Loss (Given) ( 2,600)
Eligible Dividends 2,500
Gross Up Of 45 Percent 1,125
RRSP Deduction (Part A) ( 8,916)
2007 Net Income For Tax Purposes \$71,065

Taxable Income As Mr. Sali has no deductions applicable to the determination of Taxable Income, his
2007 Taxable Income is equal to his 2007 Net Income For Tax Purposes.

## Tax On First \$37,178 \$5,763

Tax On Next \$33,887 (\$71,065 - \$37,178) At 22 Percent 7,455
Tax Before Credits \$13,218
Tax Credits:
Basic Personal Amount (\$ 8,929)
Employment Insurance ( 720)
Canada Pension Plan ( 1,990)
Canada Employment ( 1,000)
Medical Expenses (Note Four) ( 1,324)
Total Credit Base (\$13,963)
Rate 15.5% ( 2,164)
Charitable Donations
[15.5%)(\$200) + (29%)(\$800 + \$1,400 - \$200)] ( 611)
Dividend Tax Credit On Eligible Dividends [(11/18)(\$1,125)] ( 688)
Federal Tax Payable \$9,755

Note Four The base for Mr. Sali’s medical expense tax credit would be his unreimbursed
expenses of \$3,250 [(1 - 0.8)(\$16,250)], reduced by the lesser of \$2,132 [(3%)(\$71,065)] and
\$1,926. This amount would be \$1,324 (\$3,250 - \$1,926).
Solution to Assignment Case Thirteen - 2
Net Employment Income The calculations required for 2006 and 2007 would be as follows:
2006 2007
Salary \$47,000 \$53,000
Commissions 6,200 7,800
RPP Contributions ( 1,800) ( 1,950)
Home Office Costs (Note 1) ( 1,001) ( 1,073)
Net Employment Income \$50,399 \$57,777

Note 1 Because she has commission income, Kerri can deduct all of the listed costs other than
mortgage interest. As an employee, she cannot deduct CCA on this office space. The deduction
for 2006 would be \$1,001 [(15%)(\$1,850 + \$625 + \$4,200)]. The corresponding figure for 2007
would be \$1,073 [(15%)(\$2,040 + \$715 + \$4,400)].

Net Rental Income The calculations required for 2006 and 2007 would be as follows:
2006 2007
Rents \$ 8,400 \$13,800
Expenses Other Than CCA ( 10,300) ( 11,100)
Income (Loss) Before CCA (\$ 1,900) \$ 2,700
CCA (Note 2) N/A ( 2,700)
Net Rental Income (\$ 1,900) \$ Nil

Note 2 As CCA cannot be used to increase or create a rental loss, no deduction can be made in
2006. For 2007, the CCA maximum available deduction is \$10,400 [(4%)(\$340,000 - \$80,000)].
However, the actual deduction is limited to the \$2,700 of rental income prior to the deduction of
CCA.

Employer’s Shares The tax consequences related to buying, holding, and selling her employer’s shares are
as follows:
Proceeds Of Disposition [(5,000)(\$14.75)] \$73,750
Adjusted Cost Base [(5,000)(\$12.00)] ( 60,000)
Capital Gain \$13,750
Inclusion Rate 1/2
Taxable Capital Gain \$ 6,875

During 2006, the shares paid dividends of \$3,750 [(5,000)(\$0.75)]. However, as dividends are not a
component of earned income, this is not relevant to the requirements of this problem. The 2007 dividends
were \$3,000 [(\$5,000)(\$0.60)]. This amount will be included in Net Income For Tax Purposes, along with
the appropriate 45 percent gross up.

Child Care Costs Kerri’s deductible child care costs are the least of three amounts:
Actual Costs The actual costs were given as \$8,600.
Annual Limit The annual limit is \$11,000 (\$7,000 for Barry and \$4,000 for Kim).
Income Limit For this purpose, Ms. Sosteric’s “earned income” is her gross employment income
of \$60,800 (\$53,000 + \$7,800). Two-thirds of this amount is \$40,533.
The least of these figures is the actual costs of \$8,600.
RRSP Deduction Determining the appropriate amount here requires the calculation of Earned Income for
2006. The calculation is as follows:
Net Employment Income \$50,399
RPP Contributions Deducted 1,800
Spousal Support Received [(12)(\$500)] 6,000
Net Rental Loss ( 1,900)
2006 Earned Income \$56,299

Using this figure, Ms. Sosteric’s maximum 2007 deduction, along with the additional contribution required
to make this deduction, would be calculated as follows:
Opening Unused Deduction Room \$ 6,200
Lesser Of:
• 2007 RRSP Dollar Limit = \$19,000
• 18% Of 2006 Earned Income Of \$56,299 = \$10,134 10,134
Less 2006 PA (Employee And Employer RPP Contributions) ( 3,600)
Maximum RRSP Deduction \$12,734
Undeducted Contributions In Plan ( 5,800)
Required Additional Contribution \$ 6,934

Net Income For Tax Purposes Ms. Sosteric’s 2007 Net Income For Tax Purposes would be calculated as
follows:
Employment Income \$57,777
Spousal Support Received 6,000
Net Rental Income Nil
Taxable Capital Gains 6,875
Eligible Dividends [(5,000)(\$0.60)] 3,000
Gross Up Of 45 Percent 1,350
Universal Child Care Benefit 1,200
Child Care Costs ( 8,600)
RRSP Deduction ( 12,734)
2007 Net Income For Tax Purposes \$54,868

Taxable Income As Ms. Sosteric has no deductions applicable to the determination of Taxable Income, her
2007 Taxable Income is equal to her 2007 Net Income For Tax Purposes.
Tax Payable The required calculations here are as follows:
Tax On First \$37,178 \$5,763
Tax On Next \$17,690 (\$54,868 - \$37,178) At 22 Percent 3,892
Tax Before Credits \$9,655
Tax Credits:
Basic Personal Amount (\$ 8,929)
Eligible Dependant (Either Barry or Kim) ( 8,929)
Child [(2)(\$2,000)] ( 4,000)
Employment Insurance ( 720)
Canada Pension Plan ( 1,990)
Canada Employment ( 1,000)
Medical Expenses (Note 3) ( 974)
Total Credit Base (\$26,542)
Rate 15.5% ( 4,114)
Dividend Tax Credit [(11/18)(\$1,350)] ( 825)
Federal Tax Payable \$4,716

Note 3 The base for Ms. Sosteric’s medical expense tax credit would be her total expenses of
\$2,620, reduced by the lesser of \$1,646 [(3%)(\$54,868)] and \$1,926. This amount would be \$974
(\$2,620 - \$1,646).
Solution to Assignment Case Thirteen - 3 (PRC)
With the increase in Seymour’s income due to the RRSP withdrawal, he is no longer the lower income
spouse. Mary must deduct the \$3,100 in child care expenses.

Although no contributions can be made to a deceased individual’s RRSPs after the date of death, ITA
146(5.1) permits the deceased individual’s legal representative to make contributions to the surviving
spouse’s RRSP in the year of death or during the first 60 days after the end of that year. Contributions
made to a spouse’s RRSP can be claimed on the deceased individual’s return. However, such payments are
subject to limits based on the deceased taxpayer’s Earned Income in the year prior to death, plus any
Unused RRSP Deduction Room available from previous years. As a result, even though Seymour has
Earned Income in 2006, no RRSP contributions based on that income can be made in 2007.

## Opening Unused RRSP Deduction Room \$19,762

Plus The Lesser Of:
• \$18,000 (2006 Maximum)
• [(18%)(\$45,000)] = \$8,100 8,100
RRSP Deduction Limit \$27,862

Mary’s maximum deductible contribution for 2007, assuming she does not contribute further to her RRSP
in her name for 2006, is as follows:

## Unused RRSP Deduction Room At The End Of 2005 \$14,091

Plus The Lesser Of:
• \$18,000 (2006 Maximum)
• [(18%)(\$125,000)] = \$22,500 18,000
RRSP Deduction Limit For 2006 \$32,091
Contributions Made For 2006 ( 22,200)
Unused RRSP Deduction Room At The End Of 2006 \$ 9,891
Plus The Lesser Of:
• \$19,000 (2007 Maximum)
• [(18%)(\$152,866)] = \$27,516 19,000
RRSP Deduction Limit For 2007 \$28,891

Mary should contribute her maximum for 2007 as soon as possible to take advantage of the tax free
compounding inside the RRSP. Even if she does not receive the life insurance benefit before the end of
February, she should consider contributing up to \$9,891 in order to maximize her RRSP deduction for
2006.
If she has a self-directed RRSP, she could consider transferring securities she holds outside of her RRSP
that have fair market values higher than their adjusted cost base. Her RRSP contribution would be the fair
market value of the transferred securities. Although she would be taxed on any capital gains, it would not
be until 2007, the year of the transfer.
Mary should not transfer any investments with accrued capital losses as she would not be allowed to deduct
the resulting capital losses. However, if she wishes, she could sell them and contribute the funds.
Assuming Mary does not contribute further to her RRSP in her name for 2006, she should make the
following RRSP contributions for 2007 as soon as possible:

## RRSP Deduction Limit (Maximum Deductible For 2007)\$28,891

Allowable Overcontribution 2,000
Total Suggested RRSP Contribution for 2007 \$30,891

This includes the \$2,000 overcontribution that can be made without penalty.

Changes to the Summary form from the previous version, excluding calculated amounts other than Balance
Owing (Refund).

## Summary Line Changed Mary Seymour

Chapter 13
RRSP income 126,000
RRSP deduction 22,200 27,862
Child care expenses (all deducted by Mary) 3,100 (1,900)
Tax deducted 12,600
Balance Owing (Refund) (2,016) 31,472