Amy and Jake Smith have come to discuss their 2022 tax situation with you. They predict that Amy will not have to pay taxes this year, which they believe will allow Jake to claim the non-refundable tax credit of spouse credit. The couple has provided you with the following information, including the statements from their companies (Exhibits I and II) which they have prepared themselves but are not sure if they are correct. Jake is also the sole shareholder of Brooklyn Co., a CCPC, and would like to know the tax liability for Brooklyn Co.

Jake and Amy and family

Jake and Amy have been married for ten years. They are both 40 years old, and they have three children under the age of five. Total daycare expenses for the children were $1,000.

Jake (2022)

Jake earns a pre-tax salary of $75,000 per year from Brooklyn Co. Enhanced CPP is $461. Jake received the following benefits from Brooklyn during the year: Private health and dental care: $400 Life insurance: $500 $2,000 worth of products at cost Registered pension plan (RPP) contributions: $3,000 per year. Brooklyn Co. also deducted $3,000 from Jakes salary during the year for the RPP. Jake contributed $2,000 to an RRSP for the taxation year (within the allowable limit).

Amy (2022)

Amy began part-time employment at Fitness Inc. and earned a gross salary of $15,000 and did not have any employment income in the prior year. Amy received free use of the owners cottage for two weeks in May, which is typically rented out for $500 per week. Enhanced CPP is $94. Amy began a small home-based proprietorship last year, Amys Consulting, see Exhibit 2 for Amys accounting records. The business operates from a 200-square-foot room in the familys 2000 square foot home and is used exclusively for the business. Amy contributed $4,000 to a TFSA this year.

Required: A. Prepare the calculations (in accordance with the statutory formula of S.3 of the Income Tax Act) to determine the taxable income for both Jake and Amy for 2022. (Show calculations for Amys business income.) (30 marks) B. Determine if Jake will be able to claim the non-refundable spouse credit for the 2022 taxation year? (4 marks) C. Calculate the federal tax liability for Brooklyn Co. for 2022? (26 marks)

Exhibit I- Brooklyn Co.

	2021	2022
Revenue from manufacturing and sales	$2,000,000.00	$2,300,000.00
Dividend income from a taxable Canadian corporation	$ -	$ 9,000.00
Investment interest income	$ 2,000.00	$ 6,000.00
Cost of goods sold	$1,300,000.00	$1,500,000.00
Gross profit	$ 702,000.00	$ 815,000.00
Employees' salaries, wages, and associated costs	$ 300,000.00	$ 350,000.00
Other administrative costs	$ 250,000.00	$ 300,000.00
Net income before interest and amortization	$ 152,000.00	$ 165,000.00
Interest expense	$ 10,000.00	$ 10,000.00
Amortization	$ 15,000.00	$ 15,000.00
Net income after interest and amortization	$ 127,000.00	$ 140,000.00

Other information: 1) Capital cost allowance calculations totaled $21,000 in 2021 and $24,000 in 2022. 2) In 2022, a bonus was announced for Jakes key employee, equal to a total of 1% of the 2022 annual revenue from manufacturing and sales. The bonus has been structured to be distributed in two equal payments during 2023 on January 31st and November 30th and has been included in the 2022 employees costs. 3) Cost of goods sold and other administrative costs adhere to the rules of the Income Tax Act. 4) Interest expense is compliant with Section 20(1)(c) of the Income Tax Act. 5) Brooklyn Co.s revenue from manufacturing and sales is from active business. 6) The dividends were received from a public corporation, of which Brooklyn owns less than 1% of the shares. 7) Brooklyn did not pay any dividends in 2022.

Exhibit II - Amys Consulting

	2022
Revenue	$ 16,050.00
Administrative expenses (Note 1)	$ 14,000.00
Owners salary	$ 3,600.00
Work space in the home (Note 2)	$ 1,450.00
Net income (loss)	-$ 3,000.00

Note 1: The administrative expenses are compliant with the rules of the Income Tax Act.

Note 2: Workspace expenses represent ten percent of Amy and Jakes housing costs. The total housing costs include utilities of $2,400, mortgage interest of $8,400, property taxes of $2,500, and home insurance of $1,200. (The business has met the conditions necessary to allow for the deduction of homebased business expenses.)