AP 12-10 (Comprehensive Corporate Income Tax Payable)

Kalex Inc, a CCPC, was incorporated in 2020 and chose a December 31 taxation year end. Kalex

is a family-owned company with four equal shareholders, all of whom are siblings. The company

employs in excess of 50 employees at its head offce in Toronto, a further 80 employees at its

manufacturing facility in Oshawa, Ontario, and a further 12 employees at its offce in Syracuse,

New York. The company is primarily involved in the manufacture and sale of storage shelving and

pallets. You have been asked to prepare the 2022 corporate income tax returns. The company

provides you with its fnancial statements for the year ending December 31, 2022. The fnancial

statements have been prepared using accounting standards for private enterprises (ASPE), which

represents the application of generally accepted accounting principles. No attempt has been

made to reconcile the net accounting income with net income for ITA purposes. Through your own

observations and by asking several questions you have uncovered the following information con-cerning the 2022 income and expenses of Kalex:

1. Net income for accounting purposes is $2,481,986 after deducting $325,000 of current income

tax expenses.

2. Other amounts either deducted or added in the determination of net income for accounting

purposes are as follows:

1. Bond premium amortization applied and reduced interest expenses $ 8,800

2. Amortization expense 615,000

3. Loss from employee theft (60% was recovered through insurance) 4,750

4. Deducted 10% of landscaping costs paid of $58,000 5,800

5. Deducted prepaid advertising for 24 months (covers May 1, 2022,

to April 30, 2024) 37,200

6. Deducted donations to registered charities 17,400

7. Deducted 100% of meal and entertainment expenses 62,500

8. Deducted life insurance premiums for four shareholders, none of which was

required by a creditor as security to obtain fnancing 22,000

9. Added capital dividends received from associated company 40,000

10. Deducted all of the renovation costs of adding two offces to its

headquarters in Toronto 112,000

11. Deducted all of the operating expenses for an automobile for the shareholder/

president who uses it 40% of the time for company business 11,700

12. Deducted penalties on late income tax instalments 2,900

13. Deducted interest on late municipal tax payments 1.835

14. Added a court-ordered damage award for breach of contract. The company

would have earned a proft of $37,000 had the contract been completed 33,500

15. Deducted legal expenses incurred in the breach of contract 21,000

16. Deducted annual golf club membership fees for the president to entertain

customers 19,300

1 7. Deducted reserve for estimated warranty expenses 16,275

3. Kalex estimates its doubtful account receivables by applying an historical percentage of 7.5%

to accounts that have been outstanding for more than 30 days. At December 31, 2022, those

accounts totalled $450,000, resulting in a doubtful debt expense of $33,750 [7.5% of $450,000].

After a detailed evaluation of the accounts you determine that a reasonable reserve that would

be acceptable to CRA would be $28,800. The 2021 reasonable reserve claimed was $30,900

and no adjustment has been made for this amount in 2022.

4. On January 1, 2022, Kalex had the following UCC balances:

Class 1Toronto headquarters $1,823,600

Class 1Oshawa manufacturing 1,197,000

Class 8 648,000

Class 10 133,875

Class 13 119,000

Class 5 3375,000

Elections were fled for each of the class 1 buildings to be eligible for additional CCA. As

a result, the two buildings are in separate classes. The Oshawa building is used 100% for

non-residential purposes that is manufacturing while the Toronto headquarters building

is used exclusively (100%) for non-residential purposes that is not manufacturing. No

capital expenditures were made for the Oshawa building, but capital renovations in the

amount of $112,000 were made to the Toronto building. This amount has been deducted

for accounting purposes. The amount included in each class represents the capital cost of

the building only and not the land.

Class 8 depreciable property represents offce furniture for the two class 1 buildings. The

original cost when acquired in January 2020 was $800,000. Kalex was approached by

a new business in February 2022 operating out of Niagara Falls, Ontario. The business

leases refurbished offce furniture on long-term leases. After a round of negotiations

and running the numbers, Kalex has decided to replace all of their class 8 property with

leased property. Kalex signed a fve-year contract at $4,000 monthly. In exchange, Kalex

will receive $700,000 for all of its class 8 property. Kalex correctly expensed the lease

payments in 2022.

The class 10 property is composed of three two-seater delivery vans with extra storage

capacity. Each of the three vans cost $75,000. After hearing of the tax incentives for zero-emission vehicles and the expanding network of charging stations, the company decided

to trade in the three existing vans for three zero-emission vans that cost $95,000 each.

The vans were purchased on July 2, 2022. The company received $105,000 as a trade-in

allowance for the three existing vans.

The company acquired a 2022 Tesla Model S in early January 2022 for $130,000. The car

is used exclusively by the company president. It is estimated that the car is used by the

president 40% of the time for company business.

Midway through 2020 the company realized that the Oshawa facility lacked the necessary

storage space to accommodate its expanding inventory. They reached out to a local developer

who agreed to lease the company a warehouse that had sat empty for a few years. A fve-year

lease was signed with a renewal option for an additional fve years. The lease provides that

Kalex can make any improvements or renovations it considers necessary but that no payment

will be made by the lessor at the end of the lease as compensation for those improvements.

The company spent $140,000 on modifcations in 2020 and another $150,000 in July of 2022.

Assume that the expenditures are categorized as class 13.

In March of 2022 Kalex purchased a client list for $80,000 from a local competitor who was

on the verge of closing its doors.

In May of 2022 the company purchased new manufacturing machinery for $900,000 that

would double its output at the Oshawa facility.

Company policy is to claim the maximum CCA in each year

5. When the company began operations in early 2020 it purchased a vacant lot not far from the

Oshawa facility for $150,000. The plan was to eventually build a warehouse, but the company

opted to lease a warehouse instead. The company, as part of the leasing arrangement, agreed

to sell the land to the lessor for $460,000. The arrangements required the purchaser to pay

$175,000 on the closing date, February 1, 2022, with the remainder paid in three equal instal-ments of $100,000 each plus interest at 6% on January 31, 2023, 2024, and 2025. Kalex did

not carry a mortgage on the vacant land but did incur municipal property taxes from the day it

purchased the land to the day of sale in the amount of $11,700. No income was earned from

the vacant land throughout the period of ownership, and as a result the municipal property

taxes have not been deducted for income tax purposes. Selling costs of the land were $8,300.

The only adjustment made by the company for this transaction was the addition of an account-ing gain of $290,000. The capital gain and accounting gain are determined in the exact same

manner and are identical.

6. In late 2020 Kalex purchased 25% of the shares of Jennco Ltd., an arms-length small busi-ness corporation for $125,000. Kalex had plans to eventually purchase a controlling interest

and combine the two companies, but larger competitive companies moved in, taking over the

market and the share value began to decline rapidly. Kalex managed to sell the shares to an

arms-length investor for $10,000 three months before the company declared bankruptcy. Sell-ing costs were $1,600. Kalex deducted an accounting loss on the shares of $116,600. Jennco

never paid any dividends (taxable or capital) while Kalex owned the shares.

7. The portion of Kalexs taxable income that is considered to be earned in Canada using the for-mula in ITR 400 for the federal abatement is 83.6%.

8. The U.S. business operations resulted in net profts of C$410,000. Kalex paid U.S. income taxes

on those profts of C$77,900. For accounting purposes, however, the company only added the

U.S. profts in excess of the U.S. income taxes, or $332,100 [$410,000 $77,900].

9. Kalex has no non-capital losses but experienced a net capital loss of $52,000 in 2021 on the

sale of investments in public company shares.

10. Kalexs active business income in 2022 is $1,815,000, $1,288,000 of which represents its

Canadian M&P profts.

11. Kalex has been associated with one other CCPC since its incorporation in 2020. Both compa-nies have a December 31 taxation year end and have shared the annual small business limit

equally and will continue to do so for 2022. The TCEC of the associated group in 2021 was

$11.0 million and is $12.2 million in 2022. In addition, the AAII of the associated group in 2021

was $77,500 and is $92,300 in 2022.

Required:

A. Calculate the minimum 2022 net income for Kalex with a reconciliation that begins with net

accounting income before income taxes of $2,481,986. Make all necessary adjustments,

including CCA for each class of property together with the UCC balance as of January 1, 2023.

Show all supporting calculations.

B. Calculate the minimum 2022 taxable income for Kalex. Indicate the amount and type of any

carry overs that are available at the end of the year.

C. Calculate the minimum 2022 federal income tax payable for Kalex. The province of Ontario is

one of two provinces and one territory in Canada (Saskatchewan, and Yukon are the others)

that provides a reduced income tax rate for M&P activity. The determination of the M&P cred-its in those jurisdictions uses the federal calculations, and as a result a separate calculation of

the federal M&P deduction is required.

D. Assume (1) that the foreign tax credit for foreign business income is equal to the foreign

income taxes paid of $77,900 and (2) that the additional refundable tax (ART) is equal to

10 2/3% of aggregate investment income of $16,500.