It is March 15, 2023 and you are the controller for Maverick Ltd. (Maverick), a Canadian controlled private company based in Cold Lake Alberta.  Maverick specializes in technical consulting for the Royal Canadian Air Force (RCAF). It is owned by Pete Mitchell and his wife Shawnee Mitchell.  Pete has a 37 year old son Goose from a previous marriage. 

 

Pete has come to your office to discuss some tax issues:

 

Pete:          I have some bad news.  Goose is separating from his wife Carole.  This is going to be so hard on Rooster, their 10 year old son.  They have agreed for Carole to stay in the house with Rooster. Goose has found a 2 bedroom apartment near the house and he will have custody of Rooster on weekends.  Carole gave Goose $5,000 to help with the damage deposit and other expenses related to moving to the apartment.  She has also agreed to pay the monthly rent of $1,200 and transfer another $1,500 per month directly to Goose. They wrote an agreement out themselves with these terms.  However, they will have lawyers prepare a full divorce agreement that deals with their assets as well as any payments. Goose is wondering whether he will have to pay taxes on any of these payments.

 

You express your regrets at hearing this.  You say that you will prepare a full analysis of these payments using the spousal support criteria to determine if the payments are taxable.

 

Pete:          Thanks. I was also wondering if you have had time to complete Maverick's tax return and calculate taxes payable? I know the tax payment is due pretty soon so I need to know how much the company owes.

 

You reply that you have completed the accounting statements (Exhibit 1) and will prepare a reconciliation to determine Net Income for Tax Purposes and Taxable Income.  Then you will determine Maverick's corporate taxes payable including whether there will be net taxes owing or a refund.

 

Pete:          Great. I have a few more items for you. The first is that we finally found a larger building to move our operations into.  It is also wired with the latest information technology so it's cost is double what we will get when we sell the old building.  However, the old building is selling for $600,000 above its original cost so that helps. We have a purchase agreement for May 15, 2023 and we will put the old building up for sale as soon as we move in.   My friend told me that there may be a way to defer taxes that result from the sale of the old building. Could you look into this?

 

You reply that his friend is correct and you will determine whether this sale meets the criteria to receive a deferral and explain what the tax benefit is.

 

Pete:          Perfect. The second issue is I was hoping you could determine my RRSP limit for 2023. My tax accountant won't be able to prepare my tax return until April but I would like to make the maximum possible contribution immediately.  Here is my information for it (Exhibit 2).

 

 

 

You state that you would be happy to determine this for him.

 

Pete:          My final request is for you to determine Goose's 2022 taxes payable for him. He prepared a summary of his 2022 information (Exhibit 3).

 

While you privately think that this isn't part of your job description, you agree to do this for Goose. Pete thanks you and leaves your office.

 

Exhibit I

Maverick Ltd Income Statement

For the year ended December 31, 2022

Prepared in accordance with ASPE

 

Consulting Revenue                                                                                                    $5,400,000

Operating Expenses

              Salaries and benefits (Note 1)                                            $3,400,000

              Depreciation (Note 2)                                                               650,000

              Training                                                                                     120,000

              Travel                                                                                          92,000

              Utilities                                                                                        48,000

              Marketing (Note 3)                                                                      31,000

              Finance fees (Note 4)                                                                 24,000

              Insurance                                                                                    21,000

              Repairs and maintenance                                                          18,000

              Professional fees                                                                        12,000

              Miscellaneous (Note 5)                                                              36,000

              Loss on disposal of equipment                                                  14,000

Total Operating Expenses                                                                                             4,466,000

Income from Operations                                                                                                   934,000

Other Revenues and Expenses

              Dividend Income (Note 6)                                                          26,000

              Interest Expense                                                                       (81,000)            (55,000)    

Income before Income Taxes                                                                                           879,000

Income Tax Expense (Note 7)                                                                                         177,000

Net Income                                                                                                                       702,000

 

Notes:

1. Salaries and benefits include pension expense of $200,000.  Maverick made a pension contribution of $185,000 in 2022.
2. CCA for 2022 is $713,000.
3. Marketing includes $12,000 paid to a US advertising agency to design the pamphlet used by the company to promote its services to the Alberta government.
4. Finance fees are for a new line of credit the company obtained on October 1, 2022.
5. Miscellaneous includes $12,000 for the company's annual employee party and $15,000 for meals and entertainment with clients.
6. Dividend income consists of non eligible portfolio dividends from an associated company.  The associated company has been allocated $90,000 of the small business deduction.
7. Income tax expense consists of instalment payments made by Maverick for its 2022 taxes.
8. Maverick has a $16,000 net capital loss carry forward and $4,700 non capital loss carry forward from 2021.
9. At the end of 2021, Maverick had a NERDTOH balance of $13,000.  It received a NERDTOH dividend refund of $1,000 in 2021.
10. Maverick paid $45,000 in non eligible dividends in 2022.
    1. Gross employment                              $250,000

 

 

Exhibit 2

RRSP Information for Pete Mitchell

 

 

My RRSP contribution limit for 2022 was $34,600.  I made the following RRSP contributions:

February 2022                                                $5,000

April 2022                                                     $15,000

January 2023                                                   8,000

 

I intend to deduct the maximum RRSP contribution in 2022.  My 2022 income consists of the following items:

Employment (Note)                                    $225,000

Partnership income                                        30,000

Eligible dividends                                           18,000

Interest income                                                6,000

Rental Loss                                                     (8,000)

 

Note:

Employment income consists of the following:

1. RPP deduction                                       (10,000)   Maverick matched Pete's contribution
2. Travel deduction                                    (15,000)

 

 

 

Exhibit 3

Personal Tax Information for Goose Mitchell

 

 

My net business income for 2022 was $59,000.  I made $6,700 of instalment payments for 2022.    Carole had gross employment income of $98,000 and net employment income of $90,000.  Rooster attended an after school program that cost us $12,000 in 2022.  He also attended a 2 week camp in the summer that cost $1,800.  Carole broke her leg when she fell in January and was bed ridden for 4 weeks.  I developed pneumonia in November and was hospitalized for 3 weeks.  I received total cash dividends of $10,500 ($6,000 in eligible dividends and $4,500 of US dividends).  The US dividends were net of $500 of withholding taxes.

            

We moved into a larger house in December 2022 after we sold our townhome for $540,000.  I purchased the townhome in 2013 for $478,000 so I made a nice profit on it.  The townhouse was solely in my name, so I must report the profit.  In 2018 Carole declared a cottage her principal residence for the years 2015 to 2017 so she could eliminate the $8,200 gain she made.

 

 

Part A 

Determine whether the payments received by Goose would be spousal support payments. Explain how these will be included (or not included) in Goose's taxable income.

 

Part B 

Conduct the reconciliation of Maverick's 2022 accounting Net Income to Net Income for Tax Purposes.  Then determine Maverick's 2022 Taxable Income.

 

Part C 

Determine Maverick's Taxes Payable for 2022 including any Net Taxes Owing or Refund.