IF PROBLEM TWO - 12

Instalment Payments For Corporations

For the taxation year ending December 31, 2016, a corporation's combined federal and provincial Tax Payable is $57,600. The corresponding figure for 2017 is $67,900. For the year ending December 31, 2018, it is estimated that combined federal and provincial Tax Payable will be $62,900.

Case One Case Two

Case Three Case Four

The taxpayer is a publicly traded corporation.

The taxpayer is a publicly traded corporation. Assume that its combined federal and provincial taxes payable for the year ending December 31, 2017 were $61,400, instead of the $67,900 given in the problem.

The taxpayer is a small CCPC.

The taxpayer is a small CCPC. Assume that its combined federal and provincial taxes payable for the year ending December 31, 2017 were $61,400, instead of the $67,900 given in the problem.

Required: For each of the preceding independent Cases, provide the following information:

1. Indicate whether instalments are required during 2018. Provide a brief explanation of your conclusion.

2. Calculate the amount of instalments that would be required under each of the acceptable methods available.

3. Indicate which of the available methods would best serve to minimize instalment pay- ments during 2018. If instalments must be paid, indicate the dates on which they are due.

TIF Problem Two - 12

Instalment Payments For Corporations

Test Item File Problems for Canadian Tax Principles 2018 - 2019 61

TIF PROBLEM TWO - 13

Appeals

Mr. James Simon has asked for your services with respect to dealing with a Notice of Reassess- ment requesting additional tax for the 2014 taxation year which he says he has just received. Your first interview takes place a week later, on April 25, 2018, and Mr. Simon informs you that he has had considerable difficulty with the CRA in past years and, on two occasions in the past five years, he has been required to pay penalties as well as interest.

With respect to the current reassessment, he assures you that he has complied with the law and that there is a misunderstanding on the part of the assessor. After listening to him describe the situation, you decide it is likely that his analysis of the situation is correct.

Required: Indicate what additional information should be obtained during the interview with Mr. Simon and what steps should be taken if you decide to accept him as a client.

TIF Problem Two - 13

Appeals

Test Item File Problems for Canadian Tax Principles 2018 - 2019 62

TIF PROBLEM TWO - 14

Third Party Civil Penalties

For each of the following independent cases, indicate whether you believe any penalty would be assessed under ITA 163.2 on any of the parties involved. Explain your conclusion.

Case A

A newly acquired client, who is self-employed, brings to his accountant a listing of his business expenses. The client also provides the accountant with a figure for his total revenue. He instructs his accountant to prepare an income statement and his tax return based on this infor- mation. The accountant has a quick look at the expenses. The expenses seem to be related to the type of business of the client and nothing stands out as obviously unreasonable. After the client's income statement is prepared, it reflects $80,000 of revenue and $55,000 of expenses and the income tax return is filed on that basis.

Upon audit, the CRA finds a large proportion of the expenses claimed cannot be substantiated by adequate documentation and may not have been incurred. Furthermore, the reported revenue is only half of actual revenue.

Case B

A company is selling units in a limited partnership tax shelter. The company had acquired soft- ware for $50,000 on the open market and transferred it to the limited partnership on the same day for $10,000,000. The prospectus prepared by the company states that the fair market value of the software is $10,000,000 and is supported by an appraisal. The tax shelter is regis- tered with the CRA and is available as an investment opportunity in the current year. The company's gross entitlements are $2,000,000.

The CRA reviews the tax shelter and determines that the fair market value of the software on the day of transfer into the limited partnership is $50,000. The appraisal supporting the $10,000,000 value was prepared by an independent appraiser. However, it was not prepared using normal valuation principles. The appraiser informed the CRA that all his calculations were based on the assumptions and other relevant facts provided to him by the company. The appraiser was paid $75,000 for the appraisal.

Case C

An accountant relies on the financial statements prepared by another professional accountant to report his client's self-employment income on the client's tax return. The statements did not look obviously unreasonable. The CRA conducts an audit and discovers that the income state- ment contained material misrepresentations.

Case D

An accountant has prepared a tax return for a new client. While, the accountant has known the individual for some time, this is the first time that he has done any work for him.

In preparing the new client's tax return he is given a T4 slip which reports $40,000 in income. The client indicates that this is his only source of income.

You are surprised by this as you know that the client lives a home that is worth at least $2 million, has an expensive cottage in Huntsville, and drives a $275,000 Bentley. When the accountant asks the client about this, he indicates that, several years ago, he received a large inheritance from his parents.

The accountant does not ask any further questions and prepares and files the return. When the taxpayer is audited it is discovered that he has over $400,000 in unreported income.

TIF Problem Two - 14

Third Party Civil Penalties

Test Item File Problems for Canadian Tax Principles 2018 - 2019 63

Case E

A taxpayer approaches a tax return preparer to prepare and file his tax return. Prior to this, the tax return preparer and his firm did not provide any services to the taxpayer and they did not know each other.

The taxpayer provides the tax return preparer with a T4 slip indicating that the taxpayer has $32,000 of employment income, which represents his sole source of income.

The taxpayer tells the tax return preparer that he made a charitable donation of $20,000 but forgot the receipt at home. The taxpayer asks that the tax return preparer prepare and e-file the tax return without obtaining the receipt as it is April 29. The tax return preparer does so in order to avoid late filing the return.

Case F (Requires Basic GST Knowledge)

An annual GST return filer informs her accountant that she has not kept records of the GST paid or payable on her business purchases for the year. The accountant informs her that he will make an input tax credit claim for GST paid based on the financial statements of her business. The amounts on the financial statements are reasonable and have been incurred.

The income statement includes a large amount for wages and interest expense on which GST is not paid. The cost of sales includes a large proportion of purchases that are zero-rated on which GST is not paid. The accountant applies a factor of 5/105 to all expenses shown in the income statement. This results in an overstatement of input tax credits reported on the GST return.