James Doode decided to start his own business in 2019 after retiring from the Canadian Armed Forces. Upon retirement in 2018, James elected to receive immediate monthly pension payments from his former employer's 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 motorcycles to very exclusive clients. James hired you to prepare his personal tax return for the year 2020, as well as for his common-law partner, Susan Bond. James and Susan want to pay the very least tax possible. They will use any election or choice legally available to them to achieve that objective. James' income is mainly from his pension and personal business, while Susan's income is mainly from her salary as bookkeeper for James' business. Attached is an Appendix showing the relevant financial information pulled from the accounting records for James' business. The amounts shown have not been adjusted for tax purposes. James expects you to identify which items are allowed for tax purposes to comply with the tax laws in Canada. James and Susan have other income from their investments and rental property. Below is the information needed to prepare their tax returns. Tax forms James and Susan received are included on the Case Study link as separate documents confirming the various items of income earned for the year. Detailed Information: James was born on November 1, 1970. 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. Susan was born on December 2, 1970 and has been blind since birth but still manages to work as a bookkeeper for James' business - see separate T4 slip attached issued to Susan for 2020 and financial information for James' business in the Appendix below. Susan also has income from joint investments with James - see further below. During 2020, James received bi-weekly pension payments from his former employer's pension plan for a total pension income of $50,000 - see T4A slip attached issued to James for 2020 (box 16). Federal income tax of $8,000 was withheld at source on that pension income - see box 22 of the T4A slip. James 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 2020, James was only able to pay 3 months worth of support. James and Susan have no children but James' older brother Rick lives with them on a permanent basis since 2016 as he cannot live on his own due to a permanent mental disability. Rick was born on June 10, 1966 and has $8,000 of social assistance income for 2020 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 2020, James received $7,000 of eligible dividends on shares he owns of the Great Bank of Canada, a Canadian public company - see the T5 slip James received from the bank (box 24) for 2020. No income tax was withheld on that dividend. James and Susan earned interest income for a total of $5,000 during 2020 from a joint investment account (co-owned 50% each) - see the T5 slip James and Susan received from the bank as co-owners (box 13). No income tax was withheld on that income. During the year 2020, James sold 2,000 shares of the Great Bank of Canada (a publicly traded company) that he had acquired over the last 10 years with an average cost of $21.00 per share. The shares were sold on June 1, 2020 at a price of $72.00 per share, on which a 1% commission was paid to a broker ($0.72 per share). Rental Activities James and Susan acquired jointly (50% each) a residential property during 2020 which they rent out to earn income. The property was acquired on February 1, 2020 and rented-out for a 1-year period to a young family that recently moved to the area for $3,500/month. Below is the information relating to that property for 2020, which is co-owned in equal share by James and Susan (50% each): Address: 121 Main Street, Anytown, ON (co-owned by James and Susan equally, 50% each) Cost of property purchased: $395,000 of which $55,000 was for the land. Cost of additions made to the building in October 2020: $90,000 (addition of a garage). Due to this addition, it was agreed that the rent for the home will increase to $4,000/month starting November 1, 2020. Revenues Gross Rents $36,000 Expenses Property taxes $3,200 Insurance 1,100 Interest on mortgage 6,300 Mortgage principal 1,525 Regular maintenance & repairs 3,000 In order to finance the purchase of the rental property, James and Susan sold a cottage they also jointly owned (50% each) and used exclusively for their personal enjoyment, located at 123 Beach Lane, AnyLake, ON. They had purchased the cottage back in 2010 at a cost of $60,000. They sold the cottage on June 15, 2020 for $260,000 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 also sold a boat he owned near the cottage. The boat had a cost of $35,000 and was sold for $15,000 on June 20, 2020. James contributed $22,000 into his own RRSP on September 1, 2020. James wants to deduct the maximum amount this year. His unused RRSP Deduction Room at the end of 2019 was $10,500 and his Earned Income for 2019 (business income) was $60,000. He had no Pension Adjustment for 2019. Susan also contributed $6,000 to her own RRSP on the same date. Her unused RRSP Deduction Room at the end of 2019 was $1,500 and her Earned Income for 2019 was $20,000. She had no Pension Adjustment for 2019. 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 2020, James worked 275 hours as a volunteer on search and rescue missions for which he did not receive any compensation. Finally, James paid the following medical expenses for the year 2020: Date Patient Nature expense Amount June 1, 2020 James Chiropractor $2,000 June 5, 2020 Susan Prescriptions $ 900 Dec.20, 2020 Susan Prescriptions $ 900 Every 2 months Rick Prescriptions ($600 ea.) $3,600 TOTAL medical expenses for 2020 $7,400 Finally, James paid federal income tax instalments of $2,500 quarterly to the CRA throughout the year 2020, for a total of $10,000. APPENDIX Accounting Information for 2020 James' Specialty Bike Shop Revenues Motorcycle and Parts Sales $320,000 Expenses Purchase of inventory, parts and supplies (Note 1) $110,000 Golf club dues (Note 2) 5,000 Fines and penalties (Note 3) 7,500 Insurance (Note 4) 5,000 General office expenses 3,000 Home Office expenses (Note 5) 3,012 Salaries (Note 6) 58,000 Employer contributions to CPP and EI 3,960 Depreciation (Note 7) 45,650 Loss on sale of equipment (note 7) 8,250 Truck expenses (Note 8) 5,700 Total Expenses $255,072 Note 1: The opening inventory on January 1, 2020 was $15,000. The closing inventory on December 31, 2020 was $35,000. Note 2: James joined the local golf club to find new customers. The membership cost was $5,000 for the year. Note 3: In 2019 the business was sued for selling branded motorcycle parts without proper authorization from the brand owner. In early 2020, James reached an out-of-court settlement with the brand owner which provides that James will pay a penalty of $7,500 for pre-2020 transactions that were completed without proper authorization, in exchange for the brand owner dropping the charges against him. The penalty was paid February 1, 2020. The agreement also provided that James would enter into a new distributorship agreement with the brand owner effective January 1, 2020 - see Note 7 below for further details under "Intangible Assets". Note 4: The insurance expense includes the cost of the truck insurance of $2,000 - see Note 8 below. Note 5: Starting January 1, 2020, James moved the bookkeeping office from the shop to his home. A room representing 12% of the 1,000sq.m. home was set aside for the exclusive use of Susan's bookkeeping functions. The home has a cost of $500,000. Below are the costs for 2020 relating to the home office space: Home Insurance $1,500 Interest on mortgage $8,500 Property taxes $5,200 Home telephone line $800 Utilities $5,100 Maintenance and repairs $4,000 TOTAL $25,100 x 12% = $3,012 Note 6: There are 2 employees: one mechanic (George Dewlitle) and one bookkeeper (Susan Bond). George was paid a gross salary of $33,000 for 2020 while Susan was paid a gross salary of $25,000 for 2020. The T4 slip for Susan is included as a separate pdf document to this case study for your information, confirming the CPP contributions ($1,128.75 - box 16), EI premiums ($395.00 - box 18) and Federal Income tax ($5,000.00 - box 22) withheld at source on her salary for 2020. Note 7: The following is the information relating to the fixed assets of the business. Building: The building is 3,000 sq.m. located at 124 Main Street, Anytown, ON. A third (1/3) of the surface is used as a showroom for the customised motorcycles. The rest of the building (2/3) is used as a shop for mechanic and customization work. The building was constructed on March 1, 2019 at a cost of $195,000. The UCC for tax purposes (class 1) at the beginning of 2020 was $189,150. Truck: The truck is a Ford F150 extended cab pick-up that James uses for both business and personal purposes - see Note 8 for operating costs. The truck was purchased on June 1, 2019 at a cost of $55,000. For tax purposes, maximum CCA was deducted in 2019 leaving a UCC balance on January 1, 2020 of $25,500. Other Tangible Assets: The following details relate to the other fixed assets used in the business: CCA UCC Balance Description class Jan.1, 2020 Customizing tools and equipment class 53 $9,000 Computer-assisted design equipment class 12 $7,500 Computer class 50 $2,538 Class 53 Customizing tools were acquired on March 1, 2019 at a total cost of $12,000. For tax purposes, maximum CCA was deducted in 2019 leaving a UCC balance on January 1, 2020 of $9,000. Additional new equipment was acquired on December 1, 2020 at a cost $45,000. Class 12 Computer-assisted design (CAD) equipment was acquired on March 1, 2019 at a cost of $15,000. For tax purposes, maximum CCA was deducted in 2019 leaving a UCC balance on January 1, 2020 of $7,500. During 2020, James decided to replace the CAD equipment because it was not performing well enough for the demands of his growing business. A new more powerful CAD equipment was purchased on March 1, 2020 at a cost of $55,000. 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 equipment. The net book value for accounting purposes was $11,250 resulting in a loss of $8,250 included in the total expenses for accounting purposes for the year. Class 50 Computer hardware was acquired on March 15, 2019 at a total cost of $3,500. For tax purposes, maximum CCA was deducted in 2019 leaving a UCC balance on January 1, 2020 of $2,538. No further additions were made in 2020. Intangible Assets: On January 15, 2020, James signed a new 25-year distributorship agreement with the owner of a well-known motorcycle brand. James paid $100,000 to obtain the 25-year license, which is effective January 1, 2020. Note 8: James has a truck that he uses for both business and personal purposes. Total distance driven for the year was 29,500km of which 90% were for business (26,550km). Total truck expenses for 2020 paid by the business were as follows (included in the financial information above): Insurance $2,000 Fuel $3,200 Maintenance $2,500