COMPREHENSIVE CASE ONE JOHN SMITH AND BOB JOHNSON (CHAPTERS 4 & 5) It is October 2020 and you, CPA, a tax consultant at a mid-sized accounting firm, have just returned from your first meeting with two new clients. John Smith, one of the new clients, graduated from the University of Toronto with an engineering degree in April 2020 and is looking for some tax advice. He has received offers of employment from ABC Co. and DEF Co. Details of each offer can be found in Exhibits 1 and 2 below and on the next page. Exhibit 1: Details of offer of Employment From ABC Co. 1. Annual salary: $45,000 2. Upon signing the offer of employment, John will be granted a stock option to acquire 100 shares of ABC Co. at a price of $20 per share. At the grant date it is expected that the shares will have fair market value of $25 per share. John likes the idea of becom- ing a shareholder in the company and will exercise the option immediately. He plans to hold the shares for the long term. John: "I'm not sure whether ABC Co. is a Can- adian-controlled private corporation." 3. ABC Co. will provide John with a loan. The loan will bear interest at 1% and the loan proceeds will be used toward the purchase of a new home. The prescribed interest rate is 2% for the current quarter. Given the current economic climate, analysts expect the prescribed interest rates to increase very soon. 4. The benefits package includes a private health services plan that will provide John with coverage for prescription drugs, dental, and vision. The annual premium will be $700. 5. John will be required to use his own car and pay for all of his travelling expenses in carrying out his employment duties. If John accepts this offer, he will purchase a Honda Civic for $25,000 (including tax) in January 2021. John expects that he will incur the following costs each year: Gasoline Insurance Interest on car loan $5,000 2,000 3,000 John expects to drive the car 30,000 km per year, of which 10,000 km will be for employment Details of offer of Employment from DEF CO. 1. Annual salary: $60,000 2. Group term life insurance coverage of $50,000. The annual premium will be $500. 3. DEF Co. will provide John with a company car on December 1, 2020. The car will be leased and the monthly lease cost will be $700, including tax. DEF Co. will pay all of the car operating costs, which are expected to be $200 per month. John expects to drive the car 1,500 km per month, of which 300 km will be for employment purposes. 4. DEF Co, encourages its employees to maintain a healthy and active lifestyle. DEF Co. will provide John with a fitness club membership for his personal enjoyment. The membership cost is $100 per month. 5. John will be required to purchase his own cell phone so that he can stay connected with DEF Co's clients. John: "Can I claim a tax deduction for the cost of the phone since it is required to carry out my duties of employment?" John noted the following, "I'm really confused and I hope you can help me. I would like to understand the income tax implications associated with the benefits provided by each company." Bob Johnson, the other new client, also reached out to you for some tax advice. Bob is the CFO at GHI Inc., a Canadian-controlled private corporation. Details of your con- versation with Bob can be found in Exhibit 3. Discussion with Bob Johnson Bob: I recently joined GHI Inc. as its CFO and the job has been very challenging. The tax dir- ector resigned soon after I joined the company and I am really struggling with our tax issues." Our company is considering issuing stock options to our executive team. My controller tells me that stock-based compensation can be expensed on our income statement." "The company has a December 31 taxation year end. For the 2019 year end, the com- pany declared significant bonuses that were payable to our executive team as a reward for meeting its performance milestones. We did not have enough cash on hand earlier in the year to pay out these bonuses. We have accumulated some excess cash and should be able to pay out these bonuses next month." Required: Prepare a report addressing the income tax issues related to the two new clients. Prepared by Abraham Iqbal, CPA, CA, CPA (Illinois), MTax, Associate Professor, Teaching Stream, University of Toronto Mississauga, with support provided by the CPA/Rotman Centre for Innovation in Accounting Education COMPREHENSIVE CASE ONE JOHN SMITH AND BOB JOHNSON (CHAPTERS 4 & 5) It is October 2020 and you, CPA, a tax consultant at a mid-sized accounting firm, have just returned from your first meeting with two new clients. John Smith, one of the new clients, graduated from the University of Toronto with an engineering degree in April 2020 and is looking for some tax advice. He has received offers of employment from ABC Co. and DEF Co. Details of each offer can be found in Exhibits 1 and 2 below and on the next page. Exhibit 1: Details of offer of Employment From ABC Co. 1. Annual salary: $45,000 2. Upon signing the offer of employment, John will be granted a stock option to acquire 100 shares of ABC Co. at a price of $20 per share. At the grant date it is expected that the shares will have fair market value of $25 per share. John likes the idea of becom- ing a shareholder in the company and will exercise the option immediately. He plans to hold the shares for the long term. John: "I'm not sure whether ABC Co. is a Can- adian-controlled private corporation." 3. ABC Co. will provide John with a loan. The loan will bear interest at 1% and the loan proceeds will be used toward the purchase of a new home. The prescribed interest rate is 2% for the current quarter. Given the current economic climate, analysts expect the prescribed interest rates to increase very soon. 4. The benefits package includes a private health services plan that will provide John with coverage for prescription drugs, dental, and vision. The annual premium will be $700. 5. John will be required to use his own car and pay for all of his travelling expenses in carrying out his employment duties. If John accepts this offer, he will purchase a Honda Civic for $25,000 (including tax) in January 2021. John expects that he will incur the following costs each year: Gasoline Insurance Interest on car loan $5,000 2,000 3,000 John expects to drive the car 30,000 km per year, of which 10,000 km will be for employment Details of offer of Employment from DEF CO. 1. Annual salary: $60,000 2. Group term life insurance coverage of $50,000. The annual premium will be $500. 3. DEF Co. will provide John with a company car on December 1, 2020. The car will be leased and the monthly lease cost will be $700, including tax. DEF Co. will pay all of the car operating costs, which are expected to be $200 per month. John expects to drive the car 1,500 km per month, of which 300 km will be for employment purposes. 4. DEF Co, encourages its employees to maintain a healthy and active lifestyle. DEF Co. will provide John with a fitness club membership for his personal enjoyment. The membership cost is $100 per month. 5. John will be required to purchase his own cell phone so that he can stay connected with DEF Co's clients. John: "Can I claim a tax deduction for the cost of the phone since it is required to carry out my duties of employment?" John noted the following, "I'm really confused and I hope you can help me. I would like to understand the income tax implications associated with the benefits provided by each company." Bob Johnson, the other new client, also reached out to you for some tax advice. Bob is the CFO at GHI Inc., a Canadian-controlled private corporation. Details of your con- versation with Bob can be found in Exhibit 3. Discussion with Bob Johnson Bob: I recently joined GHI Inc. as its CFO and the job has been very challenging. The tax dir- ector resigned soon after I joined the company and I am really struggling with our tax issues." Our company is considering issuing stock options to our executive team. My controller tells me that stock-based compensation can be expensed on our income statement." "The company has a December 31 taxation year end. For the 2019 year end, the com- pany declared significant bonuses that were payable to our executive team as a reward for meeting its performance milestones. We did not have enough cash on hand earlier in the year to pay out these bonuses. We have accumulated some excess cash and should be able to pay out these bonuses next month." Required: Prepare a report addressing the income tax issues related to the two new clients. Prepared by Abraham Iqbal, CPA, CA, CPA (Illinois), MTax, Associate Professor, Teaching Stream, University of Toronto Mississauga, with support provided by the CPA/Rotman Centre for Innovation in Accounting Education