AFM 362 - Taxation I Fall 2020 Group Assignment Your friend Nathan was so appreciative of the advice you provided to him about incorporation of his income, so he referred a co-worker to you who needed some desperate help with their taxes. Ms. Karen Liang is employed as a Procurement Director at Four Scasons Total Landscaping Inc., a Canadian-controlled private corporation. She is provided with a car owned by the corporation to allow her to travel to the various offices of the company. An amount is withheld from her salary for the personal use of the car, which in 2020 is 30% of the 30,000 total kilometres driven in the year by Karen. Karen is considered to be a "key employees and receives various benefits, including stock options. Karen, age 34, has been married to Richard, age 36, for the last five years. They both live together in a home they purchased in Richmond Hill, Ontario three years ago. Richard is the President and sole shareholder of his own company, Thank Mr Goose Inc., that prints custom designed merchandise for creators on social media platforms. He receives a modest salary from the company annually for his role as President of the company. He has been paying himself the same $60,000 annual salary since he started the company in 2010. Karen presents you with a shopping bag full of receipts and notes written on scraps of paper from which you develop the following information about Karen's income for the 2020 taxation year: $183,746 58,404 $242.150 $ 8,100 Net salary Withholding by employer from salary Income tax withheld (federal and provincial) $42.000 Registered Pension Plan (employee contribution) 8,400 Canada Pension Plan Premiums 2.898 Employment Insurance Prcinius 856 Charitable donations made w Chiled Way 1,000 Group term life insurance 750 Group disability insurance (40% of total premium) 400) Payment for personal use of company car 2.100 Total gross salary Travel allowance paid by cmployer ($135 per day for 60 days) Book value of company-owned automobile provided to Karen (original capital cost in November 2019 of S32,000, plus 13% HST; capital cost allowance claimed by company in 2020 of S4,950; operating costs paid by cmployer for 2020 of 89.575, including HST) Payment received from group disability plan for short-term disability by falling ola loading dock (she paid premiums of a total of $1,200 since commencing employment in 2016 and she has not received benefits previously) Amounts paid by the cployer: Group lerm life insurance policy premiuins 450 Group disability insurance plan (60% of premium) 600 Sun Life extended medical insurance premium 900) Registered Pension Plan (employer contribution) 31.210 3,750 8.400) 1,500 950 500 900 200 200 Proceeds received from sale of 100 shares of stock (representing less than 1% of all shares) acquired under the employee stock option plan at an option price of S10 per share (when she was granted the option in 2016, the fair market value of the stock was $12; when shc cxcrcised the option in 2016, the fair market value was $13) Tees paid by company for University of Waterloo correspondence course in philosophy taken on Karen's own initiative on her own lime Premium paid by Karen on personal whole life insurance policy Membership fees paid by Karen for a gym membership Interest received on Canada Savings Bonds purchased through payroll savings plan Birthday gift paid in cash under company policy and deducted by employer Value of company required uniforini monogrammed with the lirin's logo and provided by the company Premiums paid by Karen for Manulife private dental insurance with coverage for the entire family Dues paid by Karen 10 the Procurement Association of Canada, a professional body recognized by legal statule Capital gain on sale of shares purchased as a result of a stock tip given by a co-worker who was told by a friend that Air Canada stock was about to take off Bonus payable on December 31, 2020 but not paid to Karen until January 2021 Expenses paid by company for Richard who accompanied her on work trip to Vancouver 2,700 3,500 450 1,200 4,000 2,0950 The following information pertains to Richard's income for the 2020 taxation year: Net salary S42.246 Withholding by employer from salary Income tax withheld (federal and provincial) $14.000 Canada Pension Plan Premiums Employment Insurance Premium 856 17.754 Total gross salary S60.000 2.898 45,000 15,000 Dividends received from a portfolio of investments in Canadian public corporations Gross rental income from rental property Rental expenses associated with rental property Undepreciated Capital Cost of Rental Property at January 1, 2020 (Class 1) 2019 Unused RRSP deduction room carry-forward RRSP contributions made by Richard to his own RRSP in 2020 12,000 356,000 5,000 7,500 In 2018, Karen transferred the portfolio of investments in Canadian public corporations and the rental property to Richard to try and save lax because she is in the highest marginal tax bracket, Karen and Richard did not elect out of the automatic spousal rollover on the transfer of the properties. However, Richard did pay Karen full fair market value on the transfer of the rental properly on the advice of their real estate lawyer, The following information is taken from the financial statements of Thank Mr Goose Inc. for its fiscal year ended December 31, 2020: Thank Mr Goose Inc. Condensed Unaudited Income Statement For the Year Ended December 2020 Sales S5.650,000 Cost of goods sold (4,050,000) Gross profit $ 1.600,000 Selling expenses $975.000 General and administrative expenses 195.000 (1,170.000) Net income before provision for income taxes $ 430,000 Provision for income taxes current $220.000 future 310.000 (530,000) Net loss after tax $ (100,000) Included in sales for the year is a deposit of $8,200 received from a customer for goods that will be delivered next year. The following items were deducted in arriving at the above net income: 1. During the year, a warehouse worker managed to remove valuable inventory worth $8,000 during the night shift by taking it out in his lunch box. 2. Late in the year, it became apparent that some products in inventory would go out of style. The company expects this decline to take place in about six months. As a result, they decided to set up a general reserve for a decline in the inventory value in the amount of $17,000. They have never set up this kind of reserve before. 3. In general and administrative expenses, the company included $10,000 of interest income that the company received in 2020. This interest income was received from a high-interest savings account that the company used to invest its excess working capital. 4. Charitable donations were made in the amount of $9,000. 5. Golf club membership fees in the amount of $2,600 were paid for the sales manager who used the club regularly to close sales. 6. The sales manager incurred expenses related to meals and entertainment at the golf club in the amount of $2.300. 7. Management bonuses of S96,000 were accrued at December 31, 2020 (S35,000 will not be paid until June 30, 2021 due to lack of sufficient funds). 8. The December holiday banquet for the employees cost $15,000. 9. The company had a dispute with one of its major suppliers over the use of the supplier's product. As a result of a court decision, the supplier was awarded damages for breach of contract in the amount of $38,000. 10. In order to raise money for expansion, the company mortgaged the real estate it used in the business. It incurred accounting fees of $5,000 and appraisal fees of S2,000 related to this financing. The mortgage has a 10-year term and a 30-year amortization period. 11. During the year, the company bought the shares of another company. In completing this transaction, legal fees of $8,500 were incurred. 12. During the year, the company borrowed to buy new equipment. The interest expense related to this was $23,000. 13. Instead of borrowing money at the bank, the company decided to pay their income tax instalments late. This resulted in an interest charge from the Canada Revenue Agency in the amount of $390. 14. A life insurance policy was taken out on Richard's life in order to provide funding for the company in the event of his death. This life insurance policy was not required as a condition of any of the company's borrowings. Life insurance premiums on this policy amounted to $4,600. 15. Business interruption insurance premiums of $3,300 were paid to protect the company in the event a fire forced them to close for a period of time. 16. Computer software costing $750 related to word processing was expensed because they always bought the upgrades cach year. 17. Amortization expense on the fixed assets was $86,000. 18. The company paid a non-eligible dividend of S5,000 to Richard on December 15, 2020. An examination of the capital cost allowance schedule for 2020 provided the following opening balances for the undepreciated capital cost for each class of the company's assets: Class - building $188,383 Class 8 office furniture and equipment 60,000 Class 10 trucks for transportation of goods 80,000 Class 12 small tools 5.000 Class 13 leasehold improvements. 187,500 Class 44 Patent and rights limited life. 90.000 The following additional information was found in the 2020 fixed asset schedules working paper files. 1. The building which cost $997,426 in 2010 was sold for $150.000. It was the only building in Class 1 at the time of its sale. A new building was purchased in April 2020 for $750,000. Also, in February 2020 a lot adjacent to the new building, was purchased for $100,000 for use as a parking lot by employees and visitors. This lot was paved at a cost of $25,000. A fence was erected around an outside storage area near the new building at a cost of $40,000. 2. New office furniture was purchased for $20,000. This purchase replaced old assets which were sold for $5.000. None of the old assets was sold for more than the original capital cost. 3. Three small trucks purchased in 2015 for $12,000 cach were traded in for three new rucks. Each new truck was priced at $15.000, but this was reduced by a trade-in credit of $2,500 for each old truck. 4. Some small tools were sold for a total of $7,000. All of these tools were sold at a price less than their original capital cost. 5. Leasehold improvements had been made to a leased warehouse at a cost of $225,000 in September 2018. The remaining length of the lease in that year was six years with two successive renewal options of three years each. Further leasehold improvements were made to this warehouse in 2020 at a cost of $21,000. 6. During 2020, an unlimited life franchise was purchased for $48,000. 7. Accounting gains and losses on the above assct sales netted to nil. Karen and Richard tell you that they are so grateful for your help as their former tax accountant won the lottery and moved away to the Cayman Islands to retire carlier in the year. They need help figuring out how much income they earned personally as well as in Richard's corporation and they would like to know how much personal and corporate tax they owe for the 2020 taxation year. Required: Calculate the taxable income and total tax payable by Karen, Richard, and Thank Mr Goose Inc. for the 2020 taxation year. Provide a brief explanation for any items omitted from your calculations. Prepare a reporting letter to Karen and Richard to provide any qualitative analysis necessary to supplement your calculations, any appropriate recommendations that your group may want to make to Karen and Richard, and to summarize your conclusions / quantitative analysis. Assumptions: Richard is not a shareholder of any other private corporation Thank Mr Goose Inc. operates with less than $10 million of taxable capital (net assets) and the company did not have any adjusted aggregate investment income in the prior taxation Vear The provincial corporate tax rate is 4% on income eligible for the small business deduction and 12% on all other income The personal income tax brackets for 2020 are as follows: Taxable income Federal Tax Provincial Tax Total $48,535 or less $48,535 97,069 $97.069 - 150,473 S150,473-214,369 Over $214,369 15% 87.280 + 20.5% $17.229 -26% $31,114 + 29% $49.644 +33% 10% $4,854 + 12% S10,687 + 15% $18,689 + 17% S29,551 +17% 25% $12,134 + 32.5% $27,916 +41% S49,803 + 46% $79,195 + 50% . Other Instructions: Due Date: Monday, December 7, 2020 at 11:59pm Required submission format: Reporting Letter: Microsoft Word Document o Calculations: Microsoft Excel Document Page limit for the letter: 6 pages typed double-spaced in size 12 Times New Roman with 1" page margins. The page limit count does not include a title page, a table of contents, or a bibliography/list of works ciled. You do not need to include the calculations within your reporting letter. However, Microsoft Excel should only be used for relevant quantitative analysis. Any qualitative analysis must be contained within the page limits of your letter. The assignment should be submitted to the Group Tax Assignment dropbox on LEARN. Please do PDF your submission, Show your work, where appropriate, and cite references, if any, for any external research conducted (1.c. from sources outside of the textbook and/or course notes). If you feel like any information is missing that is required for your analysis, you should make an appropriate assumption based on the known case facts. The late submission policy is outlined in the course syllabus. AFM 362 - Taxation I Fall 2020 Group Assignment Your friend Nathan was so appreciative of the advice you provided to him about incorporation of his income, so he referred a co-worker to you who needed some desperate help with their taxes. Ms. Karen Liang is employed as a Procurement Director at Four Scasons Total Landscaping Inc., a Canadian-controlled private corporation. She is provided with a car owned by the corporation to allow her to travel to the various offices of the company. An amount is withheld from her salary for the personal use of the car, which in 2020 is 30% of the 30,000 total kilometres driven in the year by Karen. Karen is considered to be a "key employees and receives various benefits, including stock options. Karen, age 34, has been married to Richard, age 36, for the last five years. They both live together in a home they purchased in Richmond Hill, Ontario three years ago. Richard is the President and sole shareholder of his own company, Thank Mr Goose Inc., that prints custom designed merchandise for creators on social media platforms. He receives a modest salary from the company annually for his role as President of the company. He has been paying himself the same $60,000 annual salary since he started the company in 2010. Karen presents you with a shopping bag full of receipts and notes written on scraps of paper from which you develop the following information about Karen's income for the 2020 taxation year: $183,746 58,404 $242.150 $ 8,100 Net salary Withholding by employer from salary Income tax withheld (federal and provincial) $42.000 Registered Pension Plan (employee contribution) 8,400 Canada Pension Plan Premiums 2.898 Employment Insurance Prcinius 856 Charitable donations made w Chiled Way 1,000 Group term life insurance 750 Group disability insurance (40% of total premium) 400) Payment for personal use of company car 2.100 Total gross salary Travel allowance paid by cmployer ($135 per day for 60 days) Book value of company-owned automobile provided to Karen (original capital cost in November 2019 of S32,000, plus 13% HST; capital cost allowance claimed by company in 2020 of S4,950; operating costs paid by cmployer for 2020 of 89.575, including HST) Payment received from group disability plan for short-term disability by falling ola loading dock (she paid premiums of a total of $1,200 since commencing employment in 2016 and she has not received benefits previously) Amounts paid by the cployer: Group lerm life insurance policy premiuins 450 Group disability insurance plan (60% of premium) 600 Sun Life extended medical insurance premium 900) Registered Pension Plan (employer contribution) 31.210 3,750 8.400) 1,500 950 500 900 200 200 Proceeds received from sale of 100 shares of stock (representing less than 1% of all shares) acquired under the employee stock option plan at an option price of S10 per share (when she was granted the option in 2016, the fair market value of the stock was $12; when shc cxcrcised the option in 2016, the fair market value was $13) Tees paid by company for University of Waterloo correspondence course in philosophy taken on Karen's own initiative on her own lime Premium paid by Karen on personal whole life insurance policy Membership fees paid by Karen for a gym membership Interest received on Canada Savings Bonds purchased through payroll savings plan Birthday gift paid in cash under company policy and deducted by employer Value of company required uniforini monogrammed with the lirin's logo and provided by the company Premiums paid by Karen for Manulife private dental insurance with coverage for the entire family Dues paid by Karen 10 the Procurement Association of Canada, a professional body recognized by legal statule Capital gain on sale of shares purchased as a result of a stock tip given by a co-worker who was told by a friend that Air Canada stock was about to take off Bonus payable on December 31, 2020 but not paid to Karen until January 2021 Expenses paid by company for Richard who accompanied her on work trip to Vancouver 2,700 3,500 450 1,200 4,000 2,0950 The following information pertains to Richard's income for the 2020 taxation year: Net salary S42.246 Withholding by employer from salary Income tax withheld (federal and provincial) $14.000 Canada Pension Plan Premiums Employment Insurance Premium 856 17.754 Total gross salary S60.000 2.898 45,000 15,000 Dividends received from a portfolio of investments in Canadian public corporations Gross rental income from rental property Rental expenses associated with rental property Undepreciated Capital Cost of Rental Property at January 1, 2020 (Class 1) 2019 Unused RRSP deduction room carry-forward RRSP contributions made by Richard to his own RRSP in 2020 12,000 356,000 5,000 7,500 In 2018, Karen transferred the portfolio of investments in Canadian public corporations and the rental property to Richard to try and save lax because she is in the highest marginal tax bracket, Karen and Richard did not elect out of the automatic spousal rollover on the transfer of the properties. However, Richard did pay Karen full fair market value on the transfer of the rental properly on the advice of their real estate lawyer, The following information is taken from the financial statements of Thank Mr Goose Inc. for its fiscal year ended December 31, 2020: Thank Mr Goose Inc. Condensed Unaudited Income Statement For the Year Ended December 2020 Sales S5.650,000 Cost of goods sold (4,050,000) Gross profit $ 1.600,000 Selling expenses $975.000 General and administrative expenses 195.000 (1,170.000) Net income before provision for income taxes $ 430,000 Provision for income taxes current $220.000 future 310.000 (530,000) Net loss after tax $ (100,000) Included in sales for the year is a deposit of $8,200 received from a customer for goods that will be delivered next year. The following items were deducted in arriving at the above net income: 1. During the year, a warehouse worker managed to remove valuable inventory worth $8,000 during the night shift by taking it out in his lunch box. 2. Late in the year, it became apparent that some products in inventory would go out of style. The company expects this decline to take place in about six months. As a result, they decided to set up a general reserve for a decline in the inventory value in the amount of $17,000. They have never set up this kind of reserve before. 3. In general and administrative expenses, the company included $10,000 of interest income that the company received in 2020. This interest income was received from a high-interest savings account that the company used to invest its excess working capital. 4. Charitable donations were made in the amount of $9,000. 5. Golf club membership fees in the amount of $2,600 were paid for the sales manager who used the club regularly to close sales. 6. The sales manager incurred expenses related to meals and entertainment at the golf club in the amount of $2.300. 7. Management bonuses of S96,000 were accrued at December 31, 2020 (S35,000 will not be paid until June 30, 2021 due to lack of sufficient funds). 8. The December holiday banquet for the employees cost $15,000. 9. The company had a dispute with one of its major suppliers over the use of the supplier's product. As a result of a court decision, the supplier was awarded damages for breach of contract in the amount of $38,000. 10. In order to raise money for expansion, the company mortgaged the real estate it used in the business. It incurred accounting fees of $5,000 and appraisal fees of S2,000 related to this financing. The mortgage has a 10-year term and a 30-year amortization period. 11. During the year, the company bought the shares of another company. In completing this transaction, legal fees of $8,500 were incurred. 12. During the year, the company borrowed to buy new equipment. The interest expense related to this was $23,000. 13. Instead of borrowing money at the bank, the company decided to pay their income tax instalments late. This resulted in an interest charge from the Canada Revenue Agency in the amount of $390. 14. A life insurance policy was taken out on Richard's life in order to provide funding for the company in the event of his death. This life insurance policy was not required as a condition of any of the company's borrowings. Life insurance premiums on this policy amounted to $4,600. 15. Business interruption insurance premiums of $3,300 were paid to protect the company in the event a fire forced them to close for a period of time. 16. Computer software costing $750 related to word processing was expensed because they always bought the upgrades cach year. 17. Amortization expense on the fixed assets was $86,000. 18. The company paid a non-eligible dividend of S5,000 to Richard on December 15, 2020. An examination of the capital cost allowance schedule for 2020 provided the following opening balances for the undepreciated capital cost for each class of the company's assets: Class - building $188,383 Class 8 office furniture and equipment 60,000 Class 10 trucks for transportation of goods 80,000 Class 12 small tools 5.000 Class 13 leasehold improvements. 187,500 Class 44 Patent and rights limited life. 90.000 The following additional information was found in the 2020 fixed asset schedules working paper files. 1. The building which cost $997,426 in 2010 was sold for $150.000. It was the only building in Class 1 at the time of its sale. A new building was purchased in April 2020 for $750,000. Also, in February 2020 a lot adjacent to the new building, was purchased for $100,000 for use as a parking lot by employees and visitors. This lot was paved at a cost of $25,000. A fence was erected around an outside storage area near the new building at a cost of $40,000. 2. New office furniture was purchased for $20,000. This purchase replaced old assets which were sold for $5.000. None of the old assets was sold for more than the original capital cost. 3. Three small trucks purchased in 2015 for $12,000 cach were traded in for three new rucks. Each new truck was priced at $15.000, but this was reduced by a trade-in credit of $2,500 for each old truck. 4. Some small tools were sold for a total of $7,000. All of these tools were sold at a price less than their original capital cost. 5. Leasehold improvements had been made to a leased warehouse at a cost of $225,000 in September 2018. The remaining length of the lease in that year was six years with two successive renewal options of three years each. Further leasehold improvements were made to this warehouse in 2020 at a cost of $21,000. 6. During 2020, an unlimited life franchise was purchased for $48,000. 7. Accounting gains and losses on the above assct sales netted to nil. Karen and Richard tell you that they are so grateful for your help as their former tax accountant won the lottery and moved away to the Cayman Islands to retire carlier in the year. They need help figuring out how much income they earned personally as well as in Richard's corporation and they would like to know how much personal and corporate tax they owe for the 2020 taxation year. Required: Calculate the taxable income and total tax payable by Karen, Richard, and Thank Mr Goose Inc. for the 2020 taxation year. Provide a brief explanation for any items omitted from your calculations. Prepare a reporting letter to Karen and Richard to provide any qualitative analysis necessary to supplement your calculations, any appropriate recommendations that your group may want to make to Karen and Richard, and to summarize your conclusions / quantitative analysis. Assumptions: Richard is not a shareholder of any other private corporation Thank Mr Goose Inc. operates with less than $10 million of taxable capital (net assets) and the company did not have any adjusted aggregate investment income in the prior taxation Vear The provincial corporate tax rate is 4% on income eligible for the small business deduction and 12% on all other income The personal income tax brackets for 2020 are as follows: Taxable income Federal Tax Provincial Tax Total $48,535 or less $48,535 97,069 $97.069 - 150,473 S150,473-214,369 Over $214,369 15% 87.280 + 20.5% $17.229 -26% $31,114 + 29% $49.644 +33% 10% $4,854 + 12% S10,687 + 15% $18,689 + 17% S29,551 +17% 25% $12,134 + 32.5% $27,916 +41% S49,803 + 46% $79,195 + 50% . Other Instructions: Due Date: Monday, December 7, 2020 at 11:59pm Required submission format: Reporting Letter: Microsoft Word Document o Calculations: Microsoft Excel Document Page limit for the letter: 6 pages typed double-spaced in size 12 Times New Roman with 1" page margins. The page limit count does not include a title page, a table of contents, or a bibliography/list of works ciled. You do not need to include the calculations within your reporting letter. However, Microsoft Excel should only be used for relevant quantitative analysis. Any qualitative analysis must be contained within the page limits of your letter. The assignment should be submitted to the Group Tax Assignment dropbox on LEARN. Please do PDF your submission, Show your work, where appropriate, and cite references, if any, for any external research conducted (1.c. from sources outside of the textbook and/or course notes). If you feel like any information is missing that is required for your analysis, you should make an appropriate assumption based on the known case facts. The late submission policy is outlined in the course syllabus