Assignment 12-10

Assignment Problem Twelve - 10 Note to Instructors: There are two points: (1) We added a comment in the lease of the ware house commentary clarifying that the expenditures fall within Class 13. This is to ensure that the expenditures are not treated as Class 1 costs as a result of ITR 1102(5). (2) Since the ART is not covered until Chapter 13 but is relevant to the tax calculations in this problem we have provided both the All and the ART tax to be included. (Comprehensive Corporate Tax Payable) Kalex Inc, a Canadian controlled private corporation, was incorporated in 2018 and selected 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 office in Toronto, a further 80 employees at its manufacturing facility in Oshawa, Ontario, and a further 12 employees at its office in Syracuse, New York. The company is primarily involved in the manu- facture and sale of storage shelving and pallets. You have been asked to prepare the corporate tax returns for 2020. The company provides you with its financial statements for the year ending December 31, 2020. The financial statements have been prepared using Accounting Standards for Private Enterprises (ASPE), which represents the application of generally accepted account- ing principles. No attempt has been made to reconcile the net accounting income with Net Income For Tax Purposes. Through your own observations and by asking several questions you have uncovered the following information concerning the 2020 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 2. Deducted amortization expense 3. Deducted loss from employee theft (60% recovered through insurance) 4. Deducted 10% of landscaping costs paid of $58,000 5. Deducted pre-paid advertising for 24 months (covers May 1, 2020, to April 30, 2022) $ 8,800 615,000 4,750 5,800 37,200 Assignment Problems $95,000 each. The vans were purchased July 2, 2020. The company received $105,000 as a trade-in allowance for the three existing vans. The company acquired a 2020 Tesla Model S in early January 2020 for $130,000. The car is used exclusively by the company president businstimated that the car is used by the company . Midway through 2018 the company realized that the Oshawa facility lacked the necessary storage space to accommodate its expanding inventory. They reached out to a loca developer who agreed to lease the company a warehouse that had sat empty for a few years. A five year lease was signed with a renewal option for an additional five 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. The company spent $140,000 on modifications in 2018 and another $150,000 in July 2020 Assume that the expenditures are within Class 13. In March 2020 Kalex acquired a client list from a local competitor who was on the verge of closing its doors. The company paid $80,000 for the client list. In May 2020 the company acquired new manufacturing machinery that would double its output at the Oshawa facility. The equipment cost $900,000. Company policy is to claim the maximum CCA it is entitled to in each year. 5. When the company began operations in early 2018 it acquired a vacant lot not far from the Oshawa facility for $150,000. The plan was to eventually build a warehouse, but the com- pany 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, 2020, with the remainder paid in three equal instalments of $100,000 each plus interest at 6 percent on January 31, 2021, 2022, and 2023. Kalex did not carry a mortgage on the vacant land but did incur municipal prop- erty taxes from the day it acquired the land to the day of sale in the amount of $11,700. No income was earned from the vacant land throughout its ownership. Selling costs of the land were $8,300. The only adjustment made by the company for this transaction was the addi- tion of an accounting gain of $290,000. The capital gain and accounting gain are determined in the exact same manner and are identical. 6. In late 2018 Kalex acquired a 25 percent shareholding of Jennco Lrd., an arm's length "small business corporation" for $125,000. Kalex had plans to eventually acquire a controlling inter est 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 arm's length investor for $10,000 three months before the company declared bankruptcy . Selling costs were $1,600. Kalex deducted an accounting loss on the shares of $116,600. Jennco never paid any dividends while Kalex owned the shares. 7. The portion of Kalex's taxable income that is considered to be earned in Canada using the 8. The U.S. business operations resulted in net profits of C$410,000. Kalex paid U.S. taxes on formula in section 400 of the ITR is 83.6 percent. of the U.S. profits in excess of the U.S. 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 2019 on sale of share investments. 10. Kalex's active business income in 2020 is $1,815,000, $1,288,000 of which represents its the Canadian manufacturing and processing profits eligible for the M&P credit. Taxable income And Tax Payable For Corporations Assignment Problems 629 11. Kalex has been associated with one other CCPC since its incorporation in 2018. Both com- panies have a December 31 taxation Year end and have shared the small business limit equally and will continue to do so for 2020. The Taxable Capital Employed in Canada of the associated group in 2019 was $11 million and $12.2 million in 2020. In addition the Adjusted Aggregate Investment Income of the associated group in 2019 was $77,500 and $92,300 in 2020. Required: A. Calculate the minimum Net Income For Tax Purposes for Kalex for 2020 with a reconciliation that begins with the net accounting income of $2,189,000. Make all necessary adjustments, including CCA for each class of property together with the UCC balance as of January 1, 2021. Show all supporting calculations. B. Calculate the minimum Taxable income for Kalex for 2020. Indicate the amount and type of any carry overs that are available at the end of the year. C. Calculate the minimum federal Part I Tax Payable for Kalex for 2020. The province of Ontario is one of three provinces and territories in Canada (Saskatchewan and Yukon are the others) that provides a reduced tax rate for M&P activity. The determination of the M&P credits 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 taxes withheld of $77,900 and (2) that the Additional Refundable Tax (ART) is equal to 10-2/3 percent of Aggregate Investment Income of $16,500. Taxable Income And Tax Payable For Corporations 627 Assignment Problems 17,400 62,500 22,000 40,000 112,000 6. Deducted donations to registered charities 7. Deducted 100% of meal and entertainment expenses 8. Deducted life insurance premiums for four shareholders 9. Added capital dividend received from associated company 10. Deducted all of the renovation costs of adding two offices to its head- quarters in Toronto 11. Deducted all of the operating costs for an automobile for the shareholder/ president who uses it 40% of the time for company business 12. Deducted penalties on late income tax instalments 13. Deducted interest on late municipal tax payments 14. Added a court-ordered damage award for breach of contract. The company would have earned a profit of $37,000 had the contract been completed 15. Deducted legal expenses incurred in the breach of contract 16. Deducted annual golf club membership fees for the president to entertain customers 17. Deducted reserve for estimated warranty expenses 11,700 2,900 1.835 33,500 21,000 19,300 16,275 3. Kalex estimates it's doubtful account receivables by applying an historical percentage of 7.5 percent to accounts that have been outstanding for more than 30 days. At December 31, 2020, those accounts totaled $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 rea- sonable reserve that would be acceptable to CRA would be $28,800. The 2019 reasonable reserve claimed was $30,900 - no adjustment has been made for this in 2020. 4. On January 1, 2020, Kalex had the following UCC balances: Class 1 - Toronto Headquarters $1,823,600 Class 1 - Oshawa Manufacturing 1,197,000 Class 8 648,000 Class 10 133,875 Class 13 119,000 Class 53 375,000 Elections were filed 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 percent for non-residential purposes that is manufacturing while the Toronto headquarters building is used exclusively (100 percent) 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. The amount included in each class represents the capital cost of the building only. Class 8 depreciable property represents office furniture and fixtures for the two Class 1 buildings. The original cost when acquired in January 2018 was $800,000. Kalex was approached by a new business in February 2020 operating out of Niagara Falls, Ontario. The business leases refurbished office furniture and fixtures 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 five 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 2020. 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