COMPREHENSIVE TAX RETURN PREPARATION CASE STUDY - 2017

As a final case study covering all the rules learned in this course, you are required to prepare comprehensive personal income tax returns using a tax preparation software.The facts you must use for this case study are given below.The completed tax returns must be submitted no later than the week before the end of the course (week 13) - see due date indicated on the Course Schedule/Calendar.I strongly recommend you work on the tax returns throughout the course, as we progress through each module, and not wait until the case study is due.In particular, it may take several days (even over a week in some cases) to obtain permission to download the free tax software that is available with this course (see below) so plan ahead.

The publisher of the textbook for this course has made arrangements with a tax software company called Intuit Canada to have a tax return software called "Profile" made available free of charge to students of this course.The process to download a free student copy of the Profile software requires that you register with Intuit Canada.This process is explained in detail in a separate message I posted in the Comprehensive Tax Return Case Study forum on the Discussion Board.It is also explained on the Student Companion Website under the "Profile Access" tab.

REQUIRED:

Using a tax preparation software - preferably the Profile software that is provided free of charge by Intuit Canada to students of this course - and the facts given below, complete the tax return (T1) for Mr. James Doode and his common-law partner, Susan Bond, for the 2017 taxation year, including all relevant schedules, forms and worksheets, e.g. Form T2125 must be used for the calculation of business income, etc.Ignore any GST or HST aspects.You must submit the completed tax returns for both James and Susan through the Case Study page on the Blackboard portal by attaching the file containing the data for both tax returns if you used the Profile tax software (both files with a .17T extension) - do not attach the program file for the Profile software (file called "profile.exe") as that file does not contain the data for the tax returns you prepared.NOTE: no marks will be given for submitting the Profile program file alone.

You can use another tax preparation software than the Profile software provided with this course.The purpose of this exercise is to work with a tax software - it doesn't matter which one you use.If you do use another software, please note that I will not be able to access the data files created by that software as I only have access to the Profile software.In that case, you will have to submit a pdf copy of the completed tax returns with all relevant schedules, forms and worksheets.If I cannot access the tax returns, I cannot grade them and no marks can be given for your work.

I have posted hints on the forum called "Comprehensive Tax Return Case Study" on the Discussion Board to help you with this assignment.

INFORMATION TO USE FOR THE TAX RETURN CASE STUDY:

James Doode is a die-hard biker who decided to start his own personal business in January 2016 after retiring from the Canadian Armed Forces.Upon retirement, James elected to receive immediate periodic pension benefits from his employer's registered pension plan. James' business consists of a motorcycle shop known as James' Specialty Bike Shop, selling and repairing motorcycles (industry code 441220). James proudly specializes in customizing specialty motorcycles such as exotic choppers to very exclusive clients. All profits from the business are reinvested in the business at this time.

James hired you to help him prepare his personal tax return for the year 2017, as well as for his common-law partner, Susan Bond. James and Susan want to pay the very least tax possible. They will make any election or choice legally available to them to achieve that objective. Below is the information they believe is relevant for the preparation of their tax returns for the current year.

Financial Statements for James' business:attached is a copy of the internal financial statements for James' business prepared by the bookkeeper.The amounts shown are those for accounting purposes only and are not adjusted for tax purposes.James expects you to be able to identify which adjustments are needed to bring those accounting figures in line with the income tax requirements to report the correct amount on his personal tax return.

Other Information:

James was born on November 1, 1967. He is divorced but currently lives with Susan Bond, his common-law partner, at 123 Main Street, Anytown, Ontario, K0H 1H0. Both have been living together for several years now. James' Social Insurance Number (SIN) is 527-000-145.

Susan's SIN is 130-692-544. She was born on December 2, 1967 and has been blind since birth but still manages to be involved in the business with James by doing the bookkeeping. Susan's only source of income is the salary she earns working as a bookkeeper at James' Specialty Bike Shop (see Note 10 to the financial statements below) and her share of other income with James (see further information below).

During 2017, James received periodic pension amounts for a total of $55,000 from his former employer's registered pension plan. Federal income tax of $6,000 was withheld at source on those payments. A T4A slip from the Canadian Armed Forces' pension plan was sent to James confirming the above pension income in box 16 and the above tax withheld in box 22.

James still has spousal support obligations from his previous marriage. He is required to pay $1,000 per month to his former spouse (Mary Doode; SIN: 527-000-129) in accordance with a court order. During the year 2017, James was only able to pay 7 months worth of support. James and Susan have no children but James' older brother Rick lives with them on a permanent basis since 2013 as he cannot live on his own due to a permanent mental disability. Rick was born on June 10, 1963 and has $9,000 of social assistance income for 2017 under the Ontario Disability Support Program. His SIN is 527-000-947. Forms T2201 have already been filed with CRA in previous years for both Susan and Rick and their condition has not changed since.

During 2017, James received $10,000 of eligible dividends on shares of the Royal Bank of Canada he owns. A T5 slip from the bank confirming the dividend received (box 24) for 2017 was sent to James. No income tax was withheld on that dividend. James and Susan also earned interest income for a total of $6,000 during 2017 from a joint investment account (each being allocated 50% of the total interest). A T5 slip was sent by the bank indicating the total interest income in box 13 and both names as joint owners. No income tax was withheld on that income either. During the year 2017, James and Susan met with a financial planner to obtain investment advice on how to maximize their investment income. Fees of $2,500 were paid by James in 2017 to the financial planner. Following the advice obtained, James decided to sell half the shares he held in Royal Bank. James owned 3,000 common shares of Royal Bank he had acquired over the last 10 years with an average cost of $40.00 per share. Half of those shares, i.e. 1,500 shares, were sold on June 1, 2017 at a price of $63.00 per share, on which a 3% commission was paid.

Rental Activities

One of James neighbours made several complaints about the noise coming from his shop. To resolve the conflict, James and Susan decided to acquire the neighbour's home jointly and rent it out. The home was acquired on July 1, 2017 and immediately leased for a 2-year period to a new tenant with occupancy as of August 1, 2017. The following information relates to the rental home for 2017, which is shared equally between James and Susan (50% each):

Address:121 Main Street, Anytown, ON (co-owned by James and Susan equally, 50% each)

Cost of home purchased:$275,000 of which $75,000 was allocated to the land.

Cost of additions made to the building in 2017 (built a new garage):$40,000.

Revenues

Gross Rents (August to December) $15,000

Expenses

Property taxes $2,000

Insurance 750

Interest on mortgage 5,975

Mortgage principal 1,025

Regular maintenance & repairs 3,500

In order to finance part of the purchase price for the rental property, James and Susan decided to sell their personal cottage that they also jointly owned (50% each) in AnyLake, ON, located at 123 Beach Lane. They had purchased the cottage back in 2007 at a cost of $75,000. They sold the cottage to a friend on June 15, 2017 for $100,000 cash. All transaction costs were borne by the purchaser. James and Susan do not want to designate the cottage as their principal residence because they feel their current home has a much greater accrued gain and want to preserve the principal residence tax exemption for that property instead.

James enrolled in a highly specialized mechanics course with his local college. This is a 2-year program that James takes part-time to keep up with the work in his shop. James paid tuition fees of $7,500, as per the form T2202A sent by the college for the courses he took during 2017. Also, according to that form, James was in part-time studies for six months during the year 2017.James wants to claim the maximum credit he can this year and carry over any unused balance.

James contributed $20,000 into his own RRSP on September 1, 2017. James wants to deduct the maximum amount of his contributions this year. His unused RRSP Deduction Room at the end of 2016 was $7,500 and his Earned Income for 2016 (his last year of work with the Armed Forces) was $125,000. He had a Pension Adjustment of $11,000 for 2016. Susan also contributed $10,000 to her own RRSP on the same date. Her unused RRSP Deduction Room at the end of 2016 was $5,500 and her Earned Income for 2015 was $15,000. She had no Pension Adjustment for 2016.

While talking with James, you discovered that as a former member of the Canadian Armed Forces he remains on call for high-risk search and rescue missions. During the year 2017, James worked 275 hours as a volunteer on search and rescue missions for which he did not receive any compensation.

James made charitable contributions of $2,000 during 2017 to the Canadian Cancer Society. Last time James or Susan made any charitable donations goes back to 2008. James also paid the following medical expenses for the year 2017:

Date Patient Nature expense Amount

June 1, 2017 James Chiropractor $ 700

June 5, 2017 Susan Prescriptions $ 800

Dec.20, 2017 Susan Prescriptions $ 700

Every 2 months Rick Prescriptions ($500 ea.) $3,000

TOTAL medical expenses for 2017 $5,200

Finally, James paid federal income tax instalments of $5,000 quarterly to the CRA throughout the year 2017, for a total of $20,000.

James' Specialty Bike Shop

Balance Sheet

As of December 31, 2017

Assets

Cash in bank $2,300

Accounts Receivable 3,600

Inventory on hand at end of year (Note 1) 50,000

Land (cost) 10,000

Building, net book value (Note 2) 141,000

Truck, net book value (Note 3) 31,500

Tools and Equipment, net book value (Note 4) 24,125

Total Assets $262,525

Liabilities

Accounts Payable $72,500

Bank Loan 58,300

Owner's Equity

James Doode, Capital 131,725

Total Liabilities and Equity $262,525

Note 1:The opening inventory on January 1st of the year was $5,000.

Note 2:The building consists of a 3,000 sq.m. structure across the street from James' home, located at 124 Main Street, Anytown, Ontario, K0H 1H0.At least half the surface is used as a showroom to sell his custom bikes. It was built by James himself after he retired from the Armed Forces. The rest of the building is used as a shop for mechanic work. The construction was completed on March 1, 2016 at a cost of $150,000. The UCC for tax purposes (class 1) at the beginning of the year was $145,500.

Note 3:The truck consists of a Ford F150 extended cab pick-up that James uses for both business and personal purposes - see Note 11 for operating expenses.The truck was purchased on June 1, 2016 at a cost of $45,000.The UCC for tax purposes at the beginning of the year was $25,500.

Note 4:The tools and equipment consist of various machines used for the maintenance and customization of motorcycles for the business.The following is the information relating to each asset:

CCA UCC Balance

Description class Jan.1, 2017

Customizing machine class 53 $0

Customizing tools class 8 $4,500

Computer-assisted design equipment class 12 $3,750

Computer class 50 $2,125

Class 53

A new customizing machine was acquired on January 20, 2017 at a cost of $17,500.

Class 8

Various customizing tools were acquired on March 15, 2016 immediately after the shop was opened for business.The cost of all tools together is $5,000.No further tools were acquired or sold in 2016 or 2017.

Class 12

Computer-assisted design equipment was initially acquired on March 15, 2016 at a cost of $7,500.However, during 2017 James decided to replace the computer-assisted design equipment purchased in 2016 because it was not performing well enough for the demands of his business.A new more powerful design equipment was purchased on March 1, 2017 at a cost of $15,000. The vendor of the new equipment accepted to take the old equipment in exchange. A trade allowance of $3,000 was received for the old design equipment (net book value for accounting purposes was $6,250).

Class 50

Computer hardware was purchased for general office work on March 15, 2016 at a cost of $2,500 in total.No further additions were made in 2016 or 2017.

James' Specialty Bike Shop

Statement of Revenues and Expenses

For the year ending on December 31, 2017

Revenues

Motorcycle and Parts Sales $450,000

Expenses

Purchase of inventory $175,000

Subcontractors-specialty painting 75,000

Local Advertising 2,500

Golf club dues (Note 5) 2,500

Business licences 1,500

Fines and penalties (Note 6) 2,700

Insurance (Note 7) 7,500

Office expenses 1,000

Home Office expenses, not including CCA (Note 8) 2,530

Business phone 2,000

Bank and interest charges (Note 9) 4,950

Salaries (Note 10) 72,000

CPP and EI contributions (employer portion) 4,845

Depreciation 29,750

Loss on sale of equipment (note 4) 3,250

Property taxes on shop 3,100

Gas & maintenance (Note 11) 6,500

Total Expenses $396,625

Net Profit (Loss) for accounting purposes $53,375

Note 5:James joined the local golf club so that he could find new customers.His golf membership cost was $2,500 for the year.

Note 6:In 2016 James' Specialty Bike Shop was charged a penalty for selling branded motorcycle products without having the proper authorization as a licensed distributor.James signed a new distributorship agreement in late 2017 and agreed to pay a fine of $2,700 to the brandname owner for previous unauthorized transactions.

Note 7:The insurance expense includes the cost of the truck insurance of $1,500 - see Note 11 below.

Note 8:During the year 2017, James decided that it would be more efficient to have Susan work out of their home instead of working at the bike shop.Starting March 1, 2017, a room in James and Susan's home was set aside for the exclusive use of Susan's bookkeeping functions.The space used represents 10% of the entire surface of the home (20 sq.m).The costs paid by James for the home office in 2017 (prorated for the period starting March 1) are as follows:

Home Insurance $1,500

Interest on mortgage $7,500

Property taxes $4,800

Home telephone line $500

Utilities $6,000

Maintenance and repairs $5,000

TOTAL $25,300 x 10% = $2,530

The home was acquired by James in 2015 at a cost of $500,000 of which $90,000 was allocated to the land.

Note 9:The interest expense includes $1,150 paid during the entire year 2017 on a loan to acquire the truck used for the business - see Note 11 below.

Note 10:The salaries expense is for one mechanic (George Dewlitle) and one bookkeeper (Susan Bond). George is paid a gross salary of $1,000 per week ($52,000/yr). James also employs his common-law partner, Susan, who does all the bookkeeping for a gross salary of $20,000 per year. The T4 slip to Susan indicated CPP withheld at source was $816.75 (box 16), EI withheld was $326.00 (box 18) and Federal Income tax withheld was $3,000.00 (box 22).

Note 11:James has an extended cab pickup truck that he uses for both business and personal purposes. James says the truck is used 60% of the time for the business - the rest is personal. Total distance driven for the year was 30,900km. Total expenses relating to the truck for the year paid by the business were as follows (already included in income statement above):

Insurance $1,500

Interest on loan $1,150

Fuel $3,210

Car washes $290

Maintenance $3,000