CANADIAN TAX

Question 2

Mr. Richmond, a new client, has invested in rental properties, principal residences and other capital property with inheritance monies and other liquid cash. He provides you with the following information with respect to his 2016 taxation year. Mr. Richmond is employed by Wealth Inc., a Canadian-controlled private corporation, and received the following income and benefits:

(1) Salary (net) .............................................. $49,953 Payroll deduction: Income taxes .................................. $15,100

CPP ......................................... 2,356

EI .......................................... 891

Registered pension plan (defined benefit: current service) 3,700

22,047$72,000

(2) Mr. Richmond paid professional fees of $500 to the Professional Engineers of Ontario.

(3) Mr. Richmond sold two lots of his stock options. He provides you with the following:

1st lot 450 shares sold on March 15, 2016, for $26.50 per share. These shares were purchased in February 2009 for $8 at which time the shares were valued at $10.50.

2nd lot 600 shares sold on December 5, 2016, for $25 per share. These shares were purchased on April 12, 2016, for $15 at which time the shares were valued at $21. The fair market value at the date of grant was $17

(4) Mr. Richmond received an interest-free loan of $9,000 on March 12, 2016, to enable him to purchase shares of Wealth Inc. The loan was outstanding until the shares were sold on December 5, at which time the loan was repaid. Assume that the prescribed rate throughout the year was 7%.

In addition, during 2016, Mr. Richmond received the following income from various sources including certain capital dispositions.

(5) Mr. Richmond sold the following assets:

Cost Proceeds

Antique foot stool ............................... . $1,100 $ 900

Painting ...................................... . 950 1,500

Stamp collection ................................. 250 850

(6) During 2016, Mr. Richmond sold his two residences, in order to purchase a larger home in an expensive suburb. The following facts relate to these two residences:

Date purchased Cost Commission Proceeds

City home ........ 2007 $95,000 $21,000 $350,000

Cottage .......... 2002 15,500 12,000 200,000

(7) In addition to his residences, Mr. Richmond owns two rental properties. The following information pertains to these two properties:

Wealthier St. Richmount St.

Cost of land ..................... $70,000 $100,000

Cost of building .................. $55,000 $ 80,000

UCC January 1, 2016, Class 1 ......$39,000$ 65,000

Rental revenue in 2015 ............. $18,000 $ 7,600

Expenses: Taxes (property) .............. $ 2,100 $ 1,800

Other expenses .............. . 4,300 6,100

Mortgage interest............. 3,600 Nil

$10,000 $ 7,900

The Richmount St. rental property was sold in November for proceeds of $250,000 less $9,000 of selling costs. Of the proceeds, $140,000 was for the land.

Mr. Richmond purchased the Wealthier St. rental property by placing a mortgage on his home. His monthly payments are $450 per month, of which $300 per month represents interest.

(8) Mr. Richmond gifted his wife $10,000 in June 2016 to allow her to invest in the stock market. Mrs. Richmond decided to be a cautious investor for the first while; as a result, she invested the $10,000 in Treasury Bills which earned $600 from June to December 2016.

(9) In addition, Mr. Richmond decided to provide his younger brother, who is 22, with a noninterest bearing loan of $5,000 to allow him to complete his Masters in Marine Biology. Mr. Richmonds brother paid his tuition fees with the funds.

(10) Mr. Richmond gifted $8,500 to each of his twin children, Dolly and Camp, aged 15. Both children placed their monies in high interest-bearing savings accounts each receiving interest of $1,050 in 2016.

(11) Mr. Richmond received dividends from the following investments:

Foreign Co. a foreign corporation (net of $88 withholding tax) ........ $500

Wealth Inc. a Canadian-controlled private corporation (from income taxed at the low corporate rate) ................................. 800

(12) Mr. Richmond owns two mutual funds, Dumark Mutual Fund and Paget Mutual Fund. He received a T3 slip from Dumark Mutual Fund indicating the following income amounts allocated to his account and reinvested in 2015:

Capital gains .............................................. $1,200

Actual amount of dividends ................................... 347

Taxable amount of dividends .................................. 500

Mr. Richmond had invested $20,000 in the Dumark Fund in 2015. This resulted in the purchase of 1,640.824 units of the fund. In 2015, income of $46.31 was allocated to his account and reinvested. The reinvestment resulted in the purchase of 3.845 units at the market value of $12.044 per unit. The 2016 income allocation resulted, on reinvestment of the $1,544.97, in the purchase of 119.358 units at the market value of $12.944 per unit. Late in 2016, after the income allocation, Mr. Richmond sold 1,000 units for a total of $12,881.

(13) Mr. Richmond sold a $100,000 Government of Canada bond for $115,327. This bond paid interest semi-annually at an interest rate which was much higher than current interest rates. The proceeds received of $115,327 included accrued interest of $5,327. Mr. Richmond had purchased the bonds on the open market for $98,000.

(14) In 2013, Mr. Richmond loaned $120,000 to his brother-in-laws company which was a small business corporation. The loan paid interest at commercial rates, but no interest was received in 2016 because the company went into receivership. As an unsecured creditor, Mr. Richmond received 10 cents on the dollar ($12,000) in 2016 in full payment of this loan.

(15) Mr. Richmond has a listed personal property loss, carried forward from 2010, of $500.

REQUIRED Determine Mr. Richmonds Division B income according to the ordering rules in section 3 for 2016. Assume that Mr. Richmond claimed $60,000 of his capital gains exemption in prior years. Ignore the effects of the leap year. (CANADIAN TAX)