You, CPA, are the tax partner in your own small accounting firm, You CPA LLP. You have just finished a meeting with two potential clients; Adnan and Hae-Min Ranger. Adnan and Hae-Min are members at the Edmonton Golf & Country Club and approached you regarding their income taxes one day after golf. Adnan is a manager at a large software firm and Hae-Min is employed part-time with the local government. Adnan and Hae-Min are unhappy with their previous accountant, who never explained things to them and was always filing their tax returns late. During the meeting Adnan and Hae-Min provided you with their previous year's income tax returns (as filed by the previous accountant) as well as an overview of their 2017 earnings and deductions. Adnan and Hae-Min would like you to prepare a preliminary calculation of their net income, taxable income and taxes payable for 2017 Preliminary information from the previous year's tax returns, as summarized by your assistant, is included in Exhibit I. Your assistant's notes from the meeting with Adnan and Hae-Min regarding their 2017 earnings are included in Exhibit II. Before Adnan and Hae-Min left the meeting, they tell you that they are worried about being able to retire when they want, with enough money to meet their goals. Adnan and Hae-Min's retirement goals and concerns are outlined in Exhibit III. Required: Please prepare the following memo's, show all of your work including detailed calculations and explanations for each calculation and items not included in the assignment. 1. Prepare one memo, to your clients Adnan and Hae-Min calculating, separately, their 2017 net income, taxable income and taxes payable based on the information provided in Exhibits I and II. The memo should include a calculation of net income, including all sources of income and any applicable deductions using the Section 3 format. Then a calculation of taxable income and taxes payable, showing all of your work. Adnan and Hae-Min were upset at their previous accountant for not explaining their taxes, therefore it is important that your memo includes any formula's used in the calculations (if in a word document), a description of any assumptions made as well as an explanation of any items not included in your calculation of net income. For full marks, please be sure to reference all information and conclusions in your memo to the appropriate section of the Income Tax Act and/or any IT Bulletins. 2. Prepare one short memo (2-4 pages) to Adnan and Hae-Min addressing their retirement query before leaving the meeting. Please be sure to answer the specific questions described in Exhibit III. References to the Income Tax Act or any IT Bulletins are not required for this memo. Recommended Approach for this Assignment: In your groups, assign the first memo (on exhibit 1 & 2) to two or three group members and the second memo (on exhibit 3) to one group member. For the first memo, assign two to three sources of income or deductions, related to either client, to each group member to compute. In addition assign one group member to calculate all of the tax credits applicable for both clients. For each source of income, deduction or credit: compute the amount to be included in the computation of net income or taxes payable, if any, then determine the appropriate ITA or income tax bulletin reference and list any assumptions/provide an explanation, as required. Then, I would recommend meeting as a whole group to combine all of the calculations and explanations into one memo (in word, excel or both). Start by combining the various sources of income or deduction for each client, using the S.3 structure for computing net income. Then, together as a group review the net income calculations, then compute taxable income for each taxpayer and gross federal taxes payable. Finally, subtract the tax credit calculations to determine net federal taxes payable. Exhibit I Information taken from the previous year's tax returns: Adnan is 47 years old and Hae-Min is 45 years old, in the current taxation year. Adnan was previously married. The divorce agreement, which was issued in 2007 requires Adnan to make monthly spousal support payments to his former spouse in the amount of $ 720 . Adnan and Hae-Min have two children: Samantha ,born August 22, 2009 and Jay , born January 13, 2013 . Both children are in good health. Hae-Min has unused RRSP contribution room from the previous taxation year of $ 5,400 Her earned income in the previous taxation year was $ 40,020 . Please note that Hae-Min has an RPP through her employer and her pension adjustment was $ 2,400 for 2016 Adnan has unused RRSP contribution room from the previous taxation year of $ 7,490 His earned income in the previous taxation year was $ 132,373 . Please note that Adnan does not have an employer provided RPP or DPSP. Adnan incurred an allowable capital loss on the sale of some of his investments in the previous year of $ 2,165 , which was not able to be utilized on his previous year's tax return as he had no taxable capital gains in the year. Exhibit II 2017 Tax Information for Adnan Adnan provided you with his 2017 T4 slip from his employer, which reports the following year amounts: Gross salary 132,273 Amounts withheld from salary: Income Tax withheld 39,682 Canada Pension Plan (CPP) 2,564 Employment Insurance (EI) 836 Union dues 513 On March 1 of the year, Adnan received stock options from his employer (which is a public company) for 120 shares at a price of $ 18.00 per share. At the time the options are issued the shares are trading at $ 16.00 per share. In June, the shares have increased in value to $ 21.60 per share when Adnan exercises his options to acquire 120 shares. As of December 31 of the year, Adnan still holds all of his shares in his public company employer. Adnan and Hae-Min purchased a residential property in Edmonton in 2016 For the current year, the income and expenses related to the rental property are as follows: Rental income per month $ 3,580 Property tax per month $ 125 Insurance per month $ 95 Mortgage payments per month $ 3,000 Principal portion of payments $ 1,500 Replacement of damaged front steps $ 690 Maximum CCA (calculated correctly) $ 10,005 Over the years, Adnan has invested a portion of his savings in the stock market and done well. Adnan keeps track of his purchases and dispositions of securities. He has provided you with the required information for all transactions in the current year, as follows: Security 1 Company name Westlawn Fabrications Purchase date May 28 2017 Original cost $ 17,470 Sale date August 3 2017 Proceeds of disposition $ 11,356 Outlays and expenses $ 590 Adnan is sure the value of these shares will rebound, therefore he purchased another 1,100 shares as follows: Purchase date August 10 2017 Cost $ 7,949 Security 2 Adnan sold 250 shares of the following: Company name Baltimore Corp. Sale date June 14 2017 Proceeds of disposition $ 7,132 Outlays and expenses $ 145 Adnan invested in this company several times over the past few years as follows: Date: # Shares: Purchase/Sale Price Purchase July 1 2009 90 $ 10.20 Purchase Aug.12 2010 180 $ 9.20 Purchase April 7 2011 444 $ 10.12 Sale March 3 2013 -240 $ 12.14 Purchase July 22 2015 165 $ 13.36 In the current year, Adnan made the following contributions to various RRSP accounts: - contribution to self-directed RRSP account at TD Waterhouse made on June 14 2017 for $ 5,018 - contribution to managed RRSP portfolio at CIBC Woodgundy made on July 22 2017 for $ 4,766 - contribution to spousal RRSP account at TD Canada Trust made on 18-Mar 2018 for $ 9,527 2017 Tax Information for Hae-Min Hae-Min provided you with her 2017 T4 slip from the City of Edmonton (her employer) which reports the following amounts: Gross salary 40,030 Amounts withheld from salary: Income taxes withheld 4,003 Canada Pension Plan (CPP) 2,564 Employment Insurance (EI) 836 RPP contributions (Note 1) $ 1,672 Pension adjustment $ 1,338 Private health care plan premiums (Note 2) $ 400 Note 1: the City of Edmonton makes matching contributions to Hae-Min 's RPP. Note 2: the City of Edmonton makes matching contributions to Hae-Min 's health care plan In addition to the above mentioned items, the City of Edmonton provides Hae-Min with the following benefits: (a) the City of Edmonton sent Hae-Min to a course on the new software which will be installed on all the workstations in the office. The cost of tuition for this course was $ 900 (b) the City of Edmonton provides Hae-Min with an annual membership at a gym called Club Buff. The annual cost of the membership is $ 1,081 . Hae-Min made the following contribution to her RRSP account: - contribution to self-directed RRSP account at TD Waterhouse made on January 21 2018 for $ 4,806 During the year, Adnan and Hae-Min paid their nanny Suzie Smith, to care for their children while they both worked. The nanny charges $ 7,450 per child, per year for caring for the children. Hae-Min has made it a habit to donate to local charities each year. During the current year, Hae-Min made the following charitable donations: - Cancer Society 200.1 - Emergency Women's Shelter 440.24001 Exhibit III Adnan and Hae-Min both hope to retire in 2039 and would like to maintain their current lifestyle plus pay for their children's post-secondary education. Adnan and Hae-Min realize that they have set themselves very high retirement goals and, as such, are concerned that they will not be able to save enough for retirement. To help them reach their retirement goals, Adnan and Hae-Min are willing to sell a number of their personal assets upon retirement. For each asset, please calculate and explain the tax consequences of the sale to your clients. Hae-Min inherited her family's cottage at the lake in 2002 , when the fair value of the cottage was $ 150,013 . The original cost, in 1979, of the cottage at the lake was $ 75,006 Hae-Min and Adnan and their children spend 4 to 6 weeks at the cottage each summer. It is estimated that the fair market value of the cottage at retirement will be $ 375,031 . Adnan owns a speedboat which originally cost $ 10,005 , and is expected to have a fair market value at the time of retirement of $ 7,804 . Hae-Min bought some vacant land 10.005 years ago for a cost of $ 99,900 . She thought that the land would appreciate and she would be able to sell it in the future for a large profit. Unfortunately, as a result of the neighbouring land being used as a maximum security prison, the value of the land has dropped significantly. Since purchasing the land, Hae-Min has rented the land to a farmer for annual rent of $ 1,099 . Each year Hae-Min pays the following expenses on the land: Property tax $ 150 Interest on funds borrowed to purchase the land $ 1,349.32 Hae-Min expects the land to only be worth $ 69,930 when she plans to sell it on retirement. Adnan owns artwork which originally cost $ 200 . Since the artist has recently died, the value of the artwork has increased dramatically. It is expected to have a fair market value at the time of retirement of $ 2,201 . Finally, to assist in meeting their lofty retirement goals, Adnan and Hae-Min need to continue contributing to their RRSP's until retirement. Calculate the 2018 RRSP contribution room for both clients, so they can plan to maximize their RRSP contributions next year.