William Smith (age 50) is married; his wife Susan (age 45) is a lawyer, and her net income in the current year is $75,000. They have two children, Jeremy, 19 years old, and Jonathan, 17 years old. Jonathan is in high school, while Jeremy commenced university this year.

• Jeremy was a full-time student enrolled in post-secondary level courses at a university in Canada from September 1 to December 31 of the current year; Jeremy had no income in the year. Mr. Smith paid Jeremy’s eligible tuition fees of $3,500; Jeremy wants to maximize the transfer (tuition, education and textbook amounts) to his father.

• Mr. Smith is employed by ABC Corporation, a Canadian public corporation, as an engineer. He received a salary of $80,000 in the current year from which the following amounts were withheld:

Withholding Category	Amount
Income taxes	$20,000.00
C.P.P.	(maximum for the year)
E.I.	(maximum for the year)
Charitable donations	1,200

Mr. Smith had the following other receipts in the current year:

• Received $1,200 in dividends (the actual amount of dividends received) from Boots Ltd., a Canadian public corporation.

• Received $3,000 interest earned on a term deposit held at the TD Bank.

• Received a net amount of $1,750 in dividends from Nexus Inc., a U.S. public corporation, which represents $2,000 in dividends and $250 in U.S. taxes paid (all figures have been translated into Canadian dollars).

Mr. Smith made the following disbursements in the current and following years:

• On December 1 of the current year, he made a donation to the United Way, a registered charity, in the amount of $400.

• Current year political donations: Federal Liberal Party: $300 and Alberta Liberal Party: $300.

• William incurred the following medical expenses during the current year:

Medical Category	Expense
Orthodontic work for Jonathan (braces removed):	$5,475
New prescription eye glasses for Jeremy:	1,250
Prescription medication for Susan (50% covered by private health care):	475
Prescription medication for William (50% covered by private health care):	785
Private health care premiums:	1,500

Mr. Smith was a shareholder in Winless Ltd., a Canadian-controlled private corporation and a small business corporation, which went into receivership (bankruptcy) in November of the current year. At that time, Winless Ltd. owed Mr. Smith $19,000 (the balance in the shareholder loan account). Mr. Smith also advises you that he purchased the shares of Winless Ltd. 15 years ago for $1,000.

Mr. Smith’s father passed in the prior year. Mr. Smith received the following at the time of his father’s death:

	Father’s ACB	FMV at Father’s Death
100 shares of XYZ Ltd. (a public co.)	$600	$2,200
Cash from his father’s estate	40,000

Mr. Smith sold the shares in XYZ Ltd. on November 1 of the current year for $3,150 and paid brokerage commission of $150 on the sale.

A review of Mr. Smith’s prior year’s tax return provides the following information:

• Losses carried forward at December 31: Net allowable capital loss = $1,500

Answer the following:

 

1.            Calculate Mr. Smith’s net income (in accordance with Section 3 of the ITA) and taxable income for the current year. Show all your calculations.

 

2.            Compute Mr. Smith’s Part 1 federal taxes payable for the current year.

 

3.            William asks you about the rules for application of loss carryovers. Explain the loss-carryover rules for a) capital losses and b) non-capital losses.

 

4.            William found some medical expense receipts from two years ago that he would like to claim on his current year’s tax return since he has heard that you can claim medical expenses from other tax years. Can you explain to William the rules regarding calculating the medical expense tax credit and how medical expenses from other taxation years can be utilized to maximize the current year’s medical expense tax credit?

 

5.            William has heard about the lifetime capital gains deduction and would like to know what kind of properties qualify for this tax treatment? Would it be possible for William to sell his shares in Boots Ltd. and not pay any tax on this disposition by utilizing the lifetime capital gains deduction?

 

6.            William provides you with a copy of the tax returns for his wife, Susan, and son, Jeremy. A review of their tax returns indicates that they both made charitable donations in the current year, with Susan’s total donations being $600 to the family church, while Jeremy made a donation to Movember (prostate cancer campaign) for $100. Should William claim these charitable donations? Explain why or why not. Advise William about tax planning for charitable donations made by family members.

 

7.            In the prior year, William assisted his father in filing his personal income tax return. William’s father is a 77-year-old widower and his only sources of income are investment income, Canada Pension Plan benefits, and Old Age Security. William noticed that his father was paying federal and provincial tax in addition to something called “tax payable under Part I.2.” William wants to know what “Part 1.2” tax is, and why his father is subject to this additional tax in the current year.