Solution to AP Four - 7

Solution to Assignment Problem Four-7

Part A
Ms. Dalvi’s minimum Net Employment Income would be calculated as follows:
Salary $143,000
Additions:
Bonus [(2/3)($34,500)] 23,000
Automobile Benefit (Note 1) 6,101
Client Meals And Entertainment (Note 2) Nil
Interest Free Loan Benefit (Note 3) 1,250
Gifts (Note 4) 1,200+300-500 = 1,000 1,100
Stock Options (Note 5) 9,600
Deductions:
RPP Contributions ( 6,400)
Professional Association Dues ( 1,200)
Net Employment Income $176,451

Note 1 The automobile benefit would be calculated as follows:

Standby Charge [(2/3)(11)($728 - $50)(15,000 ÷ 18,337*)] $4,067
Operating Cost Benefit - Lesser Of:
• [(1/2)($4,067)] = $2,034
• [($0.28)(15,000)] = $4,200 2,034
Total Benefits $6,101

*[(11)(1,667)]

As Ms. Dalvi’s employment-related use was more than 50 percent, the reduced standby charge
is available. In addition, she can use the alternative calculation of the operating cost benefit.

Note 2 Ms. Dalvi’s meal and entertainment costs exceed her employer’s reimbursement
by $5,300 ($14,800 - $9,500). However, as she has no commission income, she cannot
deduct these out-of-pocket costs.

Note 3 As there has been no change in the prescribed rate, the taxable benefit on the loan
is calculated as follows:
[(1%)($250,000)(6/12)] = $1,250

Note 4 The gift certificate for $400 is taxable because it is a near-cash gift. The first $500
of the long-service award will not be a taxable benefit. However, the excess of $700
($1,200
- $500) will be a taxable benefit. As the value of the Christmas gift basket is under $500, it
will not create a taxable benefit. The total taxable benefit is $1,100 ($400 + $700).

Note 5 The stock option benefit would be calculated as follows:

[(1,200)($45 - $37)] = $9,600
Note that, because the option price was less than the fair market value of the shares at the
time the options were granted, no ITA 110(1)(d) deduction is available in the determination
of Taxable Income (Part B).

Part B
Ms. Dalvi’s Net Income would be calaculated as follows:
Net Employment Income $176,451
Deductible CPP ($2,898 - $2,732) ( 166)
Net Income For Tax Purposes $176,285
 Solution to AP Four - 7

Part C
Ms. Dalvi’s Tax Payable would be calculated as follows: <forgot CPP>
Tax On First $150,473 $ 31,115
Tax On Next $25,812 ($176,285 - $150,473) At 29 Percent 7,485
Tax Before Credits $ 38,600
Credits:
Basic Personal Amount (Note 6) ($12,853)
Spousal Including Infirm Amount
($12,853 + $2,273 - $7,200) ( 7,926)

EI Premiums ( 856)

CPP credit ( 2,732)

Canada Employment ( 1,245)

Spouse’s Disability ( 8,576)

First Time Home Buyers’ ( 5,000)
Transfer Of Mark’s Tuition (Note 7) ( 5,000)
Medical Expenses (Note 8) ( 19,259)
Credit Base ($78,357)
Rate 15% ( 11,754)
Charitable Donations [(15%)($200)
+ (29%)($4,000 - $200)] (Note 9) ( 1,132)
Federal Tax Payable $ 25,714
Federal Tax Withheld ( 29,000)
Amount Owing (Refund) ($ 3,286)

Note 6 The Basic Personal Amount would be calculated as follows:

$13,229 - [($931][($176,285 - $150,473) ÷ $63,895 = $12,853

Note 7 As Mark has no income of his own, he cannot use any of his $9,400 tuition amount.
The transfer to his mother is limited to $5,000, leaving him with a carry forward of $4,400
($9,400 - $5,000).

Note 8 The base for Ms. Dalvi’s medical expense credit can be calculated as follows:

Ms. Dalvi, Her Spouse And Minor Child

($6,200 + $1,800) $ 8,000
Reduced By The Lesser Of:
• [(3%)($176,451)] = $5,294
• 2020 Threshold Amount = $2,397 ( 2,397)

Mary’s Medical Expenses $11,300

Reduced By The Lesser Of:
• $2,397
• [(3%)($4,800)] = $144 ( 144) 11,156

Mark’s Medical Expenses $ 2,500

Reduced By The Lesser Of:
• $2,397
• [(3%)(Nil)] = Nil ( Nil) 2,500
Allowable Medical Costs $19,259

Note 9 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.
Solution to AP Four - 7