James Doode decided to start his own business in 2020 after retiring from the Canadian Armed Forces. Since 2019, James receives monthly pension payments from his former employer's pension plan. James’ business (sole proprietorship) consists of a motorcycle shop known as James’ Specialty Bike Shop, selling and repairing motorcycles (industry code 441220).

James hired you to prepare his personal tax returns for the year 2021. James wants to pay the very least tax possible and will use any election or choice legally available. 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.

Tax forms James received are included on the Case Study link as separate documents confirming the various items of income described below for the year.

Detailed Information:

James was born on November 1, 1971. He is divorced but currently lives alone at 123 Main Street, Anytown, Ontario, K0H 1H0. James’ Social Insurance Number (SIN) is 527-000-145.

During 2021, James received bi-weekly pension payments from his former employer's pension plan for a total pension income of $40,000 - see T4A slip attached issued to James for 2021 (box 16). Federal income tax of $5,000 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 Doodle; SIN: 527- 000-129) in accordance with a court order. During the year 2021, James was only able to pay 7 months' worth of support. James has no other dependents

James made $2,000 charitable donations to the Red Cross on June 1, 2021.

Finally, James paid federal income tax installments of $5,000 quarterly to the CRA throughout the year 2021, for a total of $20,000.

APPENDIX

Accounting Information for 2021

James’ Specialty Bike Shop

Revenues

Motorcycle and Parts Sales $450,000

Expenses

Purchase of inventory, parts, and supplies (Note 1) $135,000

Golf club dues (Note 2) 5,000

Fines and penalties (Note 3) 10,000

Insurance (Note 4) 5,000

General office expenses 3,000

Home Office expenses (Note 5) 3,012

Salaries 58,000

Employer contributions to CPP and EI 3,960

Depreciation (Note 6) 41,928

Loss on sale of equipment (note 6) 8,250

Truck expenses (Note 7) 5,700

Total Expenses $278,850

Net Income for accounting purposes $171,150

Note 1: The opening inventory on January 1, 2021, was $15,000. The closing inventory on December 31, 2021, 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 2020 the business was sued for selling branded motorcycle parts without proper authorization from the brand owner. In early 2021, James reached an out-of-court settlement with the brand owner which provides that James will pay a penalty of $10,000 for pre-2021 transactions that were completed without proper authorization, in exchange for the brand owner dropping the charges against him. The penalty was paid on January 1, 2021. The agreement also provided that James would enter into a new distributorship agreement with the brand owner effective January 1, 2021 - 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 7 below.

Note 5:

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: 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 customized 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, 2020 at a cost of $195,000. The UCC for tax purposes (class 1) at the beginning of 2021 was $177,450.

Truck: The truck is a Ford F150 extended cab pick-up that James uses for both business and personal purposes – see Note 7 for operating costs. The truck was purchased on June 1, 2020, at a cost of $55,000. For tax purposes, the maximum CCA was deducted in 2020 leaving a UCC balance on January 1, 2021, of $16,500.

Other Tangible Assets: The following details relate to the other fixed assets used in the business (other than intangible assets):

CCA UCC Balance

Description class Jan.1, 2021

Customizing tools and equipment class 53 $0

Computer-assisted design equipment class 12 $7,500

Computer class 50 $613

Class 53 Customizing tools were acquired on March 1, 2020, at a total cost of $12,000. For tax purposes, the maximum CCA was deducted in 2020 leaving a UCC balance on January 1, 2021, of $0. Additional new equipment was acquired on December 1, 2021 at a cost $45,000.

Class 12 Computer-assisted design (CAD) software was acquired on April 1, 2020, at a cost of $15,000. For tax purposes, the maximum CCA was deducted in 2020 leaving a UCC balance on January 1, 2021, of $7,500. In 2021, James decided to replace the CAD software because it was not performing well enough for the demands of his growing business. A new more powerful CAD software was purchased on March 1, 2021 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 1, 2020, at a total cost of $3,500. For tax purposes, the maximum CCA was deducted in 2020 leaving a UCC balance on January 1, 2021, of $613. No further additions were made in 2021.

Intangible Assets: On January 1, 2021, 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, 2021, and expires on December 31, 2044.

Note 7: James has a truck that he uses for both business and personal purposes. The total distance driven for the year was 29,500km of which 90% were for business (26,550km). Total truck expenses for 2021 paid by the business were as follows (included in the financial information above):

Insurance $2,000

Fuel $3,200

Maintenance $2,500