Subject: Canadian Income Taxation

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It is March of 2021 and Peyton and Sean Smith have come to discuss their tax situation with you. They predict that Peyton will not have to pay taxes for the 2020 year, which they believe will allow Sean to claim the non-refundable tax credit of 'spouse credit. They have provided you with the following information, including the statements from their companies (Exhibits I and II) which they have prepared themselves but are not sure if they are correct. Sean is the sole shareholder Prairie Co. and would like to know the tax liability for Prairie. Sean and Peyton and family Sean and Peyton have been married for ten years. They are both 39 years old, and they have three children under the age of five. The children attended daycare four mornings a week during 2020 while their parents worked. The total cost of the daycare for all three children was $2,300. Sean and Peyton receive the monthly Canada child benefit for each child. Sean Sean earns a pre-tax salary of $65,000 per year from Prairie. Sean received the following benefits from Prairie in 2020: Private health and dental care: $400 Life insurance: $500 $2,000 worth of products at cost Registered pension plan (RPP) contributions: $3,000. Prairie also deducted $3,000 from Sean's salary for the RPP. Sean contributed $2,000 to an RRSP for the 2020 taxation year (which is within the allowable limit). . . . Peyton Peyton began part-time employment at Fitness Inc. in 2020, and earned a gross salary of $15,000 Peyton received free use of the owner's cottage for two weeks in May, which is typically rented out for $500 per week. Peyton began a small home-based proprietorship - "Peyton's Consulting" in 2019- which generated pre-tax profits in 2020 as noted in Exhibit II. The business operates from a 200 square foot room in the family's 2000 square foot home, and is used exclusively for the business. Peyton contributed $4,000 to a TFSA in 2020. . Required: A. Prepare the calculations (in accordance with the statutory formula of S.3 of the Income Tax Act) to determine the taxable income for both Sean and Peyton for 2020. (9 marks) B. Determine if Sean will be able to claim the non-refundable 'spouse credit for the 2020 taxation year? (1 mark) C. Calculate the federal tax liability (Part I and IV) for Prairie Co. for 2020? (10 marks) Exhibit I - Prairie Co. Revenue from manufacturing and sales Dividend income from a taxable Canadian corporation 2020 $2,300,000 9,000 Investment interest income Cost of goods sold Gross profit Salaries and wages Other administrative costs Net income before interest and amortization Interest expense Amortization Net income after interest and amortization 6,000 1,500,000 $815,000 350,000 300,000 $165,000 10.000 15,000 $140,000 Other information: 1) Capital cost allowance calculations totaled $24,000 in 2020. 2) In 2020, a bonus was announced for Sean's key employee, equal to a total of 1% of the 2020 annual revenue from manufacturing and sales' (total bonus - $23,000). The bonus has been structured to be distributed in two equal payments during 2021 on January 31st and November 30h, and has been included in the 2020 'salaries and wages'. 3) Cost of goods sold and other administrative costs' adhere to the rules of the Income Tax Act. 4) Interest expense is compliant with Section 20(1)(c) of the Income Tax Act. 5) All of Prairie's revenue from manufacturing and sales' is from active business. 6) The dividends were received from a public corporation, of which Prairie owns less than 1% of the shares 7) Prairie did not pay any dividends in 2020. Exhibit II - Peyton's Consulting Revenue Administrative expenses (Note 1) Owner's salary Work space in the home (Note 2) Net income (loss) 2020 $22,050 14,000 3,600 1,450 $3,000 Note 1: All of the administrative expenses are compliant with the rules of the Income Tax Act. Note 2: Work space expenses represent ten percent of Peyton and Sean's housing costs. The total housing costs include utilities of $2,400, mortgage interest of $8,400, property taxes of $2,500, and home insurance of $1,200. (The business has met the conditions necessary to allow for the deduction of home-based business expenses.) It is March of 2021 and Peyton and Sean Smith have come to discuss their tax situation with you. They predict that Peyton will not have to pay taxes for the 2020 year, which they believe will allow Sean to claim the non-refundable tax credit of 'spouse credit. They have provided you with the following information, including the statements from their companies (Exhibits I and II) which they have prepared themselves but are not sure if they are correct. Sean is the sole shareholder Prairie Co. and would like to know the tax liability for Prairie. Sean and Peyton and family Sean and Peyton have been married for ten years. They are both 39 years old, and they have three children under the age of five. The children attended daycare four mornings a week during 2020 while their parents worked. The total cost of the daycare for all three children was $2,300. Sean and Peyton receive the monthly Canada child benefit for each child. Sean Sean earns a pre-tax salary of $65,000 per year from Prairie. Sean received the following benefits from Prairie in 2020: Private health and dental care: $400 Life insurance: $500 $2,000 worth of products at cost Registered pension plan (RPP) contributions: $3,000. Prairie also deducted $3,000 from Sean's salary for the RPP. Sean contributed $2,000 to an RRSP for the 2020 taxation year (which is within the allowable limit). . . . Peyton Peyton began part-time employment at Fitness Inc. in 2020, and earned a gross salary of $15,000 Peyton received free use of the owner's cottage for two weeks in May, which is typically rented out for $500 per week. Peyton began a small home-based proprietorship - "Peyton's Consulting" in 2019- which generated pre-tax profits in 2020 as noted in Exhibit II. The business operates from a 200 square foot room in the family's 2000 square foot home, and is used exclusively for the business. Peyton contributed $4,000 to a TFSA in 2020. . Required: A. Prepare the calculations (in accordance with the statutory formula of S.3 of the Income Tax Act) to determine the taxable income for both Sean and Peyton for 2020. (9 marks) B. Determine if Sean will be able to claim the non-refundable 'spouse credit for the 2020 taxation year? (1 mark) C. Calculate the federal tax liability (Part I and IV) for Prairie Co. for 2020? (10 marks) Exhibit I - Prairie Co. Revenue from manufacturing and sales Dividend income from a taxable Canadian corporation 2020 $2,300,000 9,000 Investment interest income Cost of goods sold Gross profit Salaries and wages Other administrative costs Net income before interest and amortization Interest expense Amortization Net income after interest and amortization 6,000 1,500,000 $815,000 350,000 300,000 $165,000 10.000 15,000 $140,000 Other information: 1) Capital cost allowance calculations totaled $24,000 in 2020. 2) In 2020, a bonus was announced for Sean's key employee, equal to a total of 1% of the 2020 annual revenue from manufacturing and sales' (total bonus - $23,000). The bonus has been structured to be distributed in two equal payments during 2021 on January 31st and November 30h, and has been included in the 2020 'salaries and wages'. 3) Cost of goods sold and other administrative costs' adhere to the rules of the Income Tax Act. 4) Interest expense is compliant with Section 20(1)(c) of the Income Tax Act. 5) All of Prairie's revenue from manufacturing and sales' is from active business. 6) The dividends were received from a public corporation, of which Prairie owns less than 1% of the shares 7) Prairie did not pay any dividends in 2020. Exhibit II - Peyton's Consulting Revenue Administrative expenses (Note 1) Owner's salary Work space in the home (Note 2) Net income (loss) 2020 $22,050 14,000 3,600 1,450 $3,000 Note 1: All of the administrative expenses are compliant with the rules of the Income Tax Act. Note 2: Work space expenses represent ten percent of Peyton and Sean's housing costs. The total housing costs include utilities of $2,400, mortgage interest of $8,400, property taxes of $2,500, and home insurance of $1,200. (The business has met the conditions necessary to allow for the deduction of home-based business expenses.)