Dr. Zeus has engaged your services to file his income tax return. Dr. Zeus is a childrens book author who is now retired. As he is getting older, he feels his imagination and zest for life is quickly evaporating and therefore decided to live his remaining years in solitude on Salt Springs Island. Fortunately, Dr. Zeus has made more than enough money from the sale of his popular childrens books as well as a large inheritance from his parents to be able to live comfortably during retirement. Dr. Zeus has invested most of his earnings into a large investment portfolio, which paid the following amounts during the current year:

Item Amount

Eligible dividends from Aurora Inc. $43,000

Non-Eligible dividends from ABC Corp 65,500

Foreign dividends from Toyota Corp. (Note 1) 21,000

Interest from his savings account at the Royal Bank 36,500

Distributions from Altamira Mutual fund trust (Note 2) 10,800

Notes:

1 The foreign dividend has already been converted into Canadian dollars equivalents. The actual foreign dividend earned was $26,900 and the Japanese withheld the equivalent of $5,900 of taxes remitting the remaining $21,000 to Dr. Zeus.

2 Dr. Zeus owns 6000 units of Altamira Mutual fund trust which he purchased three years ago for $36 per unit. This year the trust made a distribution of $1.80 per unit. The composition of the distribution is as follows:

Capital Gains $0.90

Eligible Dividends 0.50

Interest 0.25

Return of Capital 0.15

Total per Unit $1.80

The proceeds of this distribution were invested into more units of Altamira at a cost of $38.50 per unit.

3 Dr. Zeus investment portfolio also includes a five-year Guaranteed Investment Certificate purchased 3 years ago on September 1. The GIC has a maturity value of $150,000 and an annual interest rate of 3%. The total interest earned on the GIC will be paid at maturity on September 1, two years from now. Dr. Zeus has not received any interest payments from this investment in the current year.

4 Dr. Zeus investment portfolio is managed by a large Canadian brokerage firm. The firm charged Dr. Zeus investment counsel fees of $10,500 during the current year.

5 In the previous year, Dr. Zeus received a large inheritance from his parents who both past away in a devastating car accident. He used the inheritance to purchase a rental property (Class 1, 4%) this year for $425,000. It was determined that $100,000 of the purchase price was for the land and the remaining portion was for the building. Dr. Zeus intends to claim the maximum CCA allowed on the building this year. The building is fully rented out and when a unit becomes available, Dr. Zeus has no problems finding new tenants. The rental income and expense information for the year is as follows:

Rental income $2,700 per month

Property tax 4,550 for the year

Property insurance 120 per month

Property management fees 150 per month

Utilities 600 per month

Repairs of damage caused by leaky water tank 1,500

6 To assist with the filing of his tax return, Dr. Zeus provides you with detailed records from his bank. The documents indicate that he has borrowed the following amounts from his bank:

• $200,000 mortgage on the rental property with principal repayments totalling $12,500 and interest payments of $6,500 for the current year.
• $350,000 mortgage on Dr. Zeus personal residence with principal repayments totalling $15,000 and interest payments of $7,750 for the current year.
• $150,000 loan used to purchase the mutual fund trust units with Altamira. Dr. Zeus paid interest of $4,950 on this loan during the year.
• $50,000 loan used to purchase Dr. Zeus personal use vehicle. Interest of $2,320 was paid on this loan in the current year.

7 Dr. Zeus has other income that places him in the 33% federal tax bracket and 17% provincial tax bracket for any additional income. Taxes on that income are sufficient to use all of his available tax credits before considering the effects of the investments. He lives in a province where the dividend tax credit on eligible dividends is 33% of the gross-up, and 22% of the gross-up for non-eligible dividends.

Required:

3. Calculate the per unit adjusted cost base for his investments in the Altamira mutual fund trust at year end.

4. Dr. Zeus informs you that he plans on selling his rental property in the future and using a portion of the proceeds from the sale to repay his debts with the bank. Dr. Zeus would like your advice on which loans he should pay back first in order to achieve the most favorable tax consequences.