Case 2

It is March of 2021 and Clayton and Shaleen Miller have come to discuss their tax situation with you. They predict that Clayton will not have to pay taxes for the 2020 year, which they believe will allow Shaleen to claim the non-refundable tax credit of 'spouse credit'. They have provided you with the following information, which they have prepared themselves but are not sure if they are correct. Shaleen is the sole shareholder Windy Co.

Shaleen and Clayton and family

• Shaleen and Clayton have been married for ten years.They are both 39 years old, and they have three children under the age of five. The children attended daycare four mornings a week during 2020 while their parents worked. The total cost of the daycare for all three children was $2,300. Shaleen and Clayton receive the monthly Canada child benefit for each child.

Shaleen

• Shaleen earns a pre-tax salary of $65,000 per year from Windy.
• Shaleen received the following benefits from Windy in 2020:
  • Private health and dental care: $400
  • Life insurance: $500
  • $2,000 worth of products at cost
  • Registered pension plan (RPP) contributions: $3,000.
    • Windy also deducted $3,000 from Shaleen's salary for the RPP.
• Shaleen contributed $2,000 to an RRSP for the 2020 taxation year (which is within the allowable limit).

Clayton

• Clayton began part-time employment at Fitness Inc. in 2020, and earned a gross salary of $15,000, and did not have any employment income in 2019.
• Clayton received free use of the owner's cottage for two weeks in May, which is typically rented out for $500 per week.
• Clayton began a small home-based proprietorship - "Clayton's Consulting" in 2019- which generated $250 a month in pre-tax profits in 2020. The business operates from a 200 square foot room in the family's 2000 square foot home, and is used exclusively for the business.
• Clayton did not file a tax return in 2019 since no taxes were owing.
• Clayton contributed $4,000 to a TFSA in 2020.
• More on Clayton Consulting in Exhibit 1 below:

Exhibit I - Clayton's Consulting

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

Note 2: Work space expenses represent ten percent of Clayton and Shaleen's 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 home-based business expenses.)

Required:

1. Prepare detailed calculations (in accordance with the statutory formula of S.3 of the Income Tax Act) to determine the taxable income & Tax for both Shaleen and Clayton for 2020 (40 marks).
2. Determine if Shaleen will be able to claim the non-refundable 'spouse credit' for the 2020 taxation year? (10 marks)