A bakery with a December 31^st year end purchased new equipment on October 31^st 2000 for $10,000. This was their first equipment purchase.

Required:

1. What are the tax consequences if the equipment is sold for:
   1. $3,000
   2. $8,000
   3. $12,000
2. How would your answer change if on December 31^st 2002 the business acquired new equipment costing $1,000? Would you advise them to hold off and get the equipment January 1^st 2003 instead?

Question 2 – 25%

Photo Stop, a photo franchise, started operations January 1, 2001. To start operations, the following expenses were incurred:

Automobile for deliveries	12,000
Legal costs to incorporate	5,000
Franchise fees (20 year life)	75,000
Various tools (under $200)	15,000
Furniture and fixtures	30,000
Developing equipment	80,000

The business was very profitable for the years ended 2001 and 2002. In 2002 the delivery car was traded for a newer one costing $20,000. A value of $7,000 was assigned to the old vehicle when it was traded.

In 2003 the business owner was hit by a train, as a result the assets was valued and sold on December 31 2003, for the following values:

Automobile for deliveries	15,000
Legal costs to incorporate	0
Franchise fees (20 year life)	85,000
Various tools (under $200)	10,000
Furniture and fixtures	15,000
Developing equipment	60,000
Goodwill	50,000

Required:

Determine the effect of all of these transactions on net income for tax purposes for the years 2001, 2002 and 2003.

Question 3 – 15%

Mr Ha Sleft has a question about his 2002 tax return. He used to work for Delta company in Fredericton, but has just accepted a job with Bermco in the US. On September 30, 2002 he and his family moved to the US (assume that no tax treaty exists between our two countries). He has indicated that he has no intention to return to Canada. He held the following assets when he moved from Canada.

Cost Fair Market Value

(September 30, 2002)

BCE shares $6,000 $10,000

Ski-chalet 80,000 120,000

His earned income for 2002 was as follows;

Salary – Delta, to September 30, 2002 $50,000

Salary – Bermco post September 30, 2002 40,000

BCE dividends ($250 received after (9/30/02) 1,000

Required:

1. Discuss the Canadian income tax implications to Mr. Ha Sleft of becoming a non-resident in 2003.
2. Discuss the Canadian taxation of his various sources of income.

Question 4 – 15%

• Mark works for Nortel, a public company. In January 1^st 2000 he was awarded for his exemplary service in the form of stock options. Nortel granted him options (which extended for two years) to purchase 1,000 shares of Nortel for $10 per share (at this time shares on the market were worth $10.50).
• On December 15, 2002, when the shares were worth $12, Mark decided to exercise the options and bought the 1,000 shares; he spent $10,000 (ignore any fees).
• June 15, 2003 when the shares were worth $16 each Mark sold the shares.

Required:

1. Determine the amount and type of income received by Nortel and when that income was taxable.
2. How would your answer change if the value of the shares at the date the option was granted was $10.00 rather than $10.50?
3. How would your answer change if the employer was Irving, a Canadian Controlled private corporation?

Question 5 – 15%

Ralph Jones has is very proud of himself. He has prepared his 2002 income tax return by himself (this is the first year that he has not gone to a professional preparer). Although proud, he’s cautious and has decided to ask you to review his return before he files it.

He has provided you with the following information:

• Jones works at Omega Company, a Canadian public corp. Two years ago Omega granted Jones an option to purchase 1,000 of its common shares at $16 per shrare. At the time that the option was granted, Omega’s shares were trading for $16 per share. On January 31, 2002, Jones purchased 1,000 shares of Omega (trading value at the purchase date - $22). On November 30, 20002 he sold all of the shares for $24.

• Omega requires that Jones work out of his house from time to time. Omega has supplied him with a computer and internet access for this purpose; however, Jones must pay for his own supplies. His house is 2,000 square feet and his work space is about 200 square feet. The room also doubles as a den and guest room. Utility costs for his home for 2002 were $1,200

• Jones travel out of town to Omega’s manufacturing plant. His is reimbursed for all travel costs except for meals. The plant is 90 km for the head office and he always returns home (after working 8 hours) the same day.

• He received $92,000 in basic salary. He also received $6,000 in bonuses, which he received January 15^th of 2003.

• The following amounts were deducted from his salary: CPP $660, EI premiums $893, RPP $4,400, Income tax 34,000, and Charitable donations $3,500

• Ralph has calculated his 2002 net income for tax purposes as follows:

Employment income
Salary and bonus		$ 98,000
Deductions
RPP		4,400
Employment expenses
Meals while out of town	(300 * 50%)	150
Office at home
Minor repairs	340
Utilities (200/2,000 * 1,200)	120
Office supplies and stationary	410
Computer software	220	1,090
Capital gains (Omega shares)
Selling price(1000 * 24)	24,000
Cost (1000 * 16)	16,000
Gain	8,000
Taxable portion	(1/2 of gain)	4,000
Net income		96,360

Required:

Advise Jones whether his 2002 calculation is correct. If not, recalculate a revised 2002 net income for tax purposes and let Ralph Jones know where he went wrong.

Question 6 – 10%

At a recent C Suite meeting, Joey the CEO of ABC Company remarked “Our compensation package is a bit stale. Why do we only pay employees by salary or commission? There must be other ways to pay them”

Required:

Please advise the CEO by making a list of alternative compensation packages (your list should include at least 3 alternatives). For each, briefly describe the tax consequences to ABC and to the employee.

Question 7 – 16%

Albert is an engineer. He has come to your for help with the preparation of his tax return. He has calculated his net income as follows:

Gross employment income		30,000
Less:
Alimony	7,300
Legal fees incurred	1,100
Moving expenses incurred	2,000	10,400
Net Income		19,600

He also provides the following information:

• The amount of $73,00 in alimony includes the following three types of payments. First, in February 20-1, Albert and his spouse separated and agreed verbally that Albert would pay alimony of $300 per month; this was paid for three months. In May 20-1 Albert stopped all payments. Consequently his wife took legal action. Pursuant to the judgment rendered September 1, Albert had to pay a lump sum of $5,000, as compensation plus a monthly alimony of $350 starting in September.

• The legal expenses claimed are fees paid to his lawyer to object to his wife’s legal action. The fees amounted to $1,600; it was agreed that $1,100 would be paid immediately and the balance would be paid in January 20-3.

In December 20-1, Albert was transferred and had to move from his apartment in Quebec City to a house in Montreal. He incurred $4,000 in moving expenses; only $2,000 was deducted in 20-1 because he was told that such a deduction could not exceed his new employment income (this is, $2,000 for the month of December 20-1). Albert asks you to examine his moving expenses, which are detailed as follows, in order to determine how much can be deducted in 20-2.

Meals and lodging from 12/1/20-1 to 12/23/20-1	690
Lease cancellation fee	250
Moving expenses	950
Cost of storing furniture from 12/1/20-1 to 12/23/20-1	460
Legal fees related to the purchase of his first residence in Montreal	500
Vet fees incurred when his dog was sick on arrival in Montreal	250
Expenses related to the setting up of his new residence	900
	4,000

Required:

Based on the above information, determine Albert’s income and deductions for 20-2 Show your calculations and explain your answer.

Question 8 – 16%

Dr Smith lives in one side of a duplex. He owns the whole complex and his mother lives in the adjoining suite. She pays no rent. He purchased the property for $180,000, $80,000 for the land and $100,000 for the building. Each side of the duplex is identical to each other.

Dr Smith’ mother is moving out and he is going to set up his practice in the vacant suite. The fair market value is $280,000, $100,000 for the land and $180,000 for the building. Dr Smith has no capital gains exemption available.

Required:

1. Determine the income consequences to Dr Smith of the above for tax purposes

2. Would you answer change is Dr Smith had rented the suite to a tenant he found by advertising in the classifieds (who he had not know before)?

Question 9 – 17%

2002 was a bad year. Johnny Walker hoped to be more prosperous in 2003.

Johnny’s 2002 income was as follows:

Net business income	$25,000
Gross salary	19,000
Interest income for Canadian sources	13,000
Taxable dividends from Canadian corporations	4,000
Net capital gain	30,000

In the past few years Johnny had incurred the following losses (all available for Carry forward). He intends to deduct the maximum amount for each loss available in the following order:

Non-capital loss	$70,000
Allowable capital loss	40,000

Johnny is single. He donated $10,000 to charities in 2002.

Required:

1. Compute Johnny Walker’s net income and his minimum amount of taxable income for 2002.
2. Compute, as at December 31, 2002, the amount of losses that may be carried forward.

Question 10 – 17%

Liz McClean gave her two children, aged 12 and 18, an equal number of Nortel shares that she’d owned for a few years. When she purchased the 5,000 shares she paid $25,000. The fair market value of the shares at the time of the transfer was $35,000. The shares pay annual dividends of $2,000 per year (i.e. Liz received $2,000 per year in dividends for ALL shares)

Required:

What are the tax implications as a result of the gift?

Question 11 – 17%

1. Canadian Controlled Corporations (CCPCs) differ from public corporations in the rate of tax, the extent of double taxation, and the degree of secondary relationships with shareholders. Briefly describe these differences.

1. Indicate which would pay less tax (MAKE SURE YOU JUSTIFY YOU RESPONSE):

a.A CCPC that earns business income of $100,000 in year one and $300,000 in year two (total $400,000), or

b.A corporation earning $50,000 in year one and $350,000 in year two (total$400,000)

1. Why (for tax purposes) might a corporation pay an additional salary or bonus to its shareholder/manager even though additional funds are not required by the individual?

Question 12 – 20%

John Walker has been employed as a graphic artist in Vancouver, BC. His employer is a large publicly traded Canadian company. During 2004, his gross salary was $82,500. In addition, he was awarded a $20,000 bonus to reflect his outstanding performance during the year. As he was in no immediate need of additional income, he arranged with his employer that none of this bonus would be paid until 2009, the year of his expected retirement.

Other information

For the 2004 taxation year, the following items were relevant.

1. Mr. Walker’s employer withheld the following amounts from his income:

Federal income tax	16,000
CPP	1,832
EI	772
United Way donations	2,000
Registered pension plan contributions	3,200
Payments for personal use of company car	3,600

2. During the year, John was provided an auto by his employer. The cost of the car was $27,500. John drove the car a total of 10,000km, of which only 4,000 were related to the business of his employer. The car was available to John for ten months of the year. During the other two months, he was out of the country and left the car with one of the other employees of the corporation.

3. During the year, the corporation paid Mega Financial Planners a total of $1,500 for providing counselling services to John with respect to his personal financial situation.

4. In order to assist John in purchasing a ski chalet, the corporation provided him with a five year loan of $150,000. The loan was granted October 1. Assume that, at the time the loan was granted, the relevant prescribed interest rate was 3%. Mr Walker paid the corporation a total of $375 in interest during the year.

5. John Walker was required to pay professional dues of $1,800 during the year.

Required:

Calculate Mr. Walker’s minimum net employment income for the year ending December 31, 2004. Provide reasons for omitting items that you have not included in your calculations. Ignore GST/PST considerations.

Question 13 – 5%

Acme Corp. is incorporated on August 1, 2004. On September 15, 2004 the Company acquires $115,000 in class 8 assets. The Company has a December 31, 2004 year end.

Required:

Determine the maximum CCA for the year ending December 31, 2004.

Question 14 – 5%

During 2003, the only building owned by Geo Inc., is destroyed by a meteorite. Its original cost was $1,500,000, its FMV was $1,400,000 (when it was destroyed), and the Class 1 UCC was $650,000. The Company receives $1,400,000 in insurance proceeds during 2003 and replaces the building at a cost of $2,300,000 in 2004. The Company makes the ITA 13(4) election to defer any recaptured CCA.

Required:

What is the CCA of the new building?

Question 15 – 20%

For its taxation year ending December 31, 2004, Nix Ltd has determined that its operating net income for tax purposes before any deductions for CCA amounts to $53,000. For our purposes, assume that their net income for tax purposes is the same as their taxable income for the year.

On January 1,2004 the Company has the following UCC balances:

Class 1 $876,000

Class 8 220,000

Class 10 163,000

During 2004, the cost of additions to Class 10 amounted tp $122,000, while the proceeds from dispositions in this class totalled $87,000. In no case did the proceeds of disposition exceed the capital costs of the assets retired, and there were still assets in Class 10 on December 31, 2004.

There were no acquisitions or dispositions in either Class 1 or Class 8 during 2004. During the three preceding tax years, the Company reported taxable income totalling $46,000, each year. The Company anticipates that in the long run that it will consistently produce large amounts of income. However, it is faced with considerable uncertainty with respect to profits over the next 11 to 13 years.

Required:

4. Calculate the maximum CCA that could be taken by Nix for the taxation year ending December 31, 2004.
5. As Nix’s tax advisor indicate how much CCA you would advise the Company to take for the 2004 tax year, and the specific class from which it should be deducted. Provide a brief explanation of the reasons for your recommendation. Ignore the possibility of any losses that might be available for carryover between years.

Question 16 – 5%

During 2004, Jose Day acquired a four unit apartment building for $230,000. While it was her intention to operate the building as a rental property, one month after her purchase she received an unsolicited offer to purchase the building for $280,000. She accepts the offer.

Required:

Should the $50,000 gain be treated as a capital gain or as business income?.

Question 17 – 20%

Ms. Jones is a very successful sales person. She pays all of her own business expenses and provides the following information related to her taxation year ended December 31, 2004.

1. Travel costs, largely airline tickets, food, and lodging on trips outside the area in which she resides, totalled $23,000. Included in this amount is $8,000 of business meals.

2. During the year she used 40 percent of her personal residence as an office. She has owned the property for two years. It Is her principal place of business and it is used exclusively for meeting clients on a regular basis throughout the year. Interest payment on the mortgage on this property totalled $13,500 and property taxes were $4,700. The UCC on the property is $120,000. Utilities paid for the house totalled $3,500 and house insurance paid for the year was $950. Other maintenance costs associated with the property amounted to $1,500.

3. She paid dues to the Salesperson’s Association (a trade union) of $600.

4. She was billed a total of $12,000 by a local country club. Of this amount $2,500 was a payment for membership dues and the remaining $9,500 was for meals and drinks with clients.

Required:

Calculate the maximum amount of expenses that would be deductible by Ms. Jones for 2004, assuming: (NOTE THAT EACH OF THESE i AND ii SHOULD BE CONSIDERED SEPARATELY). Ignore HST.

1. She is am employee of a manufacturing company. Her employment income of $137,000 includes $15,000 in commissions.

1. (Ignoring your thoughts in i) She represents a group of manufacturers with a diversified product line. During 2004, she earned total commissions of $137.000

Question 18 – 20 %

XYC has a fiscal year ending December 31. For the 2004 taxation year, XYZ’s accounting income (under GAAP) was $596,000. Also consider the following:

1. The Company spent $95,000 on landscaping for its main office building. This amount was recorded as an asset in the accounting records and, because the work has an unlimited life, no amortization has been recorded for the asset.

2. XYZ spent $17,000 on advertisements in Fortune Magazine, a US publication. Approximately 90 percent of its non-advertising content is original editorial content. The ads were designed to promote sales in Canadian cities located on the Canada US border.

3. Included in travel costs deducted in 2004 were $12,000 for airline tickets and $41,400 for business meals and entertainment.

4. XYZ paid and deducted for accounting purposes a $2,500 initiation fee for a corporate membership in the Highland golf and Country Club

5. XYZ paid and deducted property taxes of $15,000 on vacant land that was being held for possible future expansion of the company’s headquarters.

Required:

1. Calculate XYZ’s minimum Net Income for Tax Purposes for the 2004 taxation year.

Question 19

Tommy Jones is employed by TTC Inc in a management position. Because of an outstanding performance in his division of the Company, he is about to receive a promotion accompanied by a large increase in compensation. He is discussing various possible ways in which his compensation might be increased without incurring the same amount of taxation as would be assessed on an increase to his salary. As he is currently in the process of acquiring a large new residence in a prestigious neighbourhood, he has suggested that it might be advantageous for the Company to provide him with a five year interest free loan in the amount of $200,000 as part of any increase in compensation. Other relevant information is as follows:

• Given his current salary level, any additional salary will be taxed at 45%
• TTC Inc is able to invest funds at a before tax rate of 18%, It is subject to tax at a 40% rate.
• Assume the current rate for 5 year residential mortgages is 5%
• Assume that the current prescribed interest rate is 3%
• The loan will not qualify as a home relocation loan.

Required:

Evaluate Mr. Jones’ suggestion of providing him with an interest free loan in lieu of salary from the point of view of cost to the company.

Question 20

For it’s taxation year ending December 31, 2004, Acme Co has determined that its operating Net Income for Tax Purposes before any deduction for CCA amounts to $50,000. (Assume that it will also be their Taxable Income for the year)

On January 1, 2004, the Company has the following UCC balances:

Class 14 $876,000

Class 10 $220,000

Class 8 $163,000

During 2004, the cost of additions to Class 8 amounted to $122,000, while the proceeds from dispositions in this class totalled $87,000. In no case did the proceeds of disposition exceed the capital costs of the assets retired and there were still assets in Class 8 on December 31, 2004.

There were no acquisitions or dispositions in either Class 4 or Class 10 during 2004. During the preceding three taxation years, the Company reported Taxable income of $23,000 a year for each of the three years. The Company anticipates that in the long run, it will consistently produce large amounts of Taxable Income. However, it is faced with considerable uncertainty with respect to profits over the next 10 years.

Required:

1. Calculate the maximum CCA that could be taken by Ac