Question
Ken Potman is the sole shareholder in Brickbase Enterprises Ltd., a Regina-based construction company. In addition, Ken is a 25% partner in a retail kitchenware
Ken Potman is the sole shareholder in Brickbase Enterprises Ltd., a Regina-based construction company. In addition, Ken is a 25% partner in a retail kitchenware store, although he does not actively participate in its management. The following information relates to Kens financial affairs for the year 2020:
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Brickbase was organized three years ago. For its year ending May 31, 2020, the company earned a profit of $88,000. Ken originally contributed $200,000 to the corporation, using $50,000 of his own savings and funding the balance with a bank loan. In return, the corporation issued Ken $1,000 worth of common shares and $199,000 of preferred shares. In 2020, the company paid a dividend of $ 12,000 on the preferred shares. All of Brickbases income is subject to the small business deduction.
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During the year, Ken sold a warehouse property for $180,000 (land $15,000, building $165,000). The building was used by Brickbase to store construction equipment, and the company paid Ken a fair rental for use of the property. The property was originally purchased at a cost of $ 140,000 (land $ 10,000, building $ 130,000). At the end of 2019 the building had an undepreciated capital cost of $110,000.
Simultaneously with the sale, Ken purchased a larger warehouse property (constructed after March 18, 2007), which was also rented to Brickbase. The new property cost $400,000 (land $50,000, building $350,000). During the year, the company paid Ken net rents of $ 30,000 for both properties. The new property was financed with the proceeds from the sale of the old building as well as mortgage financing.
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The retail store partnership earned $40,000 for its year ending December 31, 2020. The profit consisted of a $32,000 profit from operations and $8,000 of interest income earned on excess undistributed cash deposits.
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On July 1 of the previous year, Ken purchased a four-year guaranteed investment certificate for $30,000 that bears interest at 10%.The interest compounds annually but is not payable until the end of the four-year term. Ken did not include any amount of interest in his previous years income.
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During the year, one of the Canadian public corporations of which Ken is a shareholder issued him 100 additional shares as a stock dividend. The shares had a stated value of $ 40 per share. Ken placed the shares in his safety deposit box along with his other securities.
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Kens other cash receipts and disbursements for 2020 are shown in the table below.
Receipts: |
|
Salary from Brickbase | $ 62,000 |
Dividends from Canadian public corporations | 6,000 |
Dividends from foreign public corporations (net of 10% foreign withholding tax) | 9,000 |
Winnings from provincial lottery | 2,000 |
Interest on a loan to his daughter | 1,000 |
Disbursements: |
|
Contribution to Brickbase employee pension plan | 3,000 |
Investment counsel fees | 1,000 |
Legal fees for registering mortgage on new warehouse | 5,000 |
Life insurance premium on policy required as collateral for the bank loan used to purchase Brickbase shares | 1,000 |
Interest on warehouse building mortgage | 21,000 |
Interest paid on house mortgage (The house mortgage is $100,000, |
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of which $70,000 was used to acquire the house. The balance was used to purchase public corporation shares.) | 10,000 |
Interest on bank loan (re: Brickbase shares) | 15,000 |
Donations to local charity | 4,000 |
Safety deposit box fees | 100 |
Required:
Determine separately, for the year 2020, Kens income for tax purposes from employment, business, and property.
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