Byrd & Chen Canadian Tax Principles 2020–2021 Study Guide Chapter 2 PDF

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Byrd & Chen Canadian Tax Principles 2020–2021 Study Guide Chapter 2, Learning Objectives, How to Work Through Chapter 2, Solutions to Exercises...

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Chapter 2 Learning Objectives

CHAPTER 2

Chapter 2 Learning Objectives After completing Chapter 2, you should be able to: 1. 2. 3. 4. 5.

Explain when an individual is required to file an income tax return (paragraph [P here-after] P 2-8 to 2-15). List the dates on which income tax returns must be filed by living and deceased individuals (P 2-16 to 2-21). Explain the nature of, and need for, withholding for income tax (P 2-22 to 2-28). Explain the circumstances which result in an individual having to make income tax instalment payments (P 2-29 to 2-33). Calculate the amount of any income tax instalment payments required for individual taxpayers and determine their due date (P 2-34 to 2-44).

6. Explain how the prescribed interest rates are used to calculate interest on amounts owing to and from the CRA (P 2-45 to 2-51). 7. Calculate the penalties that will be assessed for the late filing of income tax returns and large late and deficient instalments (P 2-52 to 2-56). 8. Identify the dates on which balances owing by living and deceased individuals are due (P 2-57 and 2-61). 9. Identify the dates on which income tax returns must be filed by corporations and the filing alternatives that are available (P 2-62 to 2-68). 10. Calculate the amount of income tax instalment payments required for corporations, including small CCPCs (P 2-69 to 2-74). 11. Identify the dates on which balances owing by corporations are due (P 2-75 and 2-76). 12. Calculate the interest and penalties that will be assessed on late tax payments and for the late filing of corporate income tax returns (P 2-77 to 2-80). 13. Explain the general filing and payment requirements for testamentary and inter vivos trusts (P 2-81 to 2-88). 14. Explain the circumstances in which a taxpayer is required to file an information return (P 2-89). 15. Describe the record keeping requirements of the CRA (P 2-90 and 2-91). 16. Briefly describe the My Account and My Business Account services available on the CRA website (P 2-92). 17. Describe the Notice of Assessment, Notice of Reassessment and explain the reassessment period (P 2-93 to 2-95). 18. Explain when interest is paid on refunds and how it is calculated (P 2-96 to 2-101). 19. Explain how to make adjustments to previously filed tax returns (P 2-102 to 2-105). 20. Explain the initial procedures for disputing an assessment and the procedures for filing a notice of objection (P 2-106 to 2-1 21).

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How to Work Through Chapter 2

21. Describe further appeals procedures, including those made to the Tax Court of Canada, the Federal Court of Appeals, and the Supreme Court of Canada (P 2-1 22 to 2-131). 22. Explain the difference between tax evasion, avoidance and planning, including the concepts involved in the General Anti-Avoidance Rule (P 2-132 to 2-141). 23. Describe the collection and enforcement procedures available to the CRA (P 2-142 to 2-147). 24. Describe some of the penalties that can be assessed including those applicable to tax advisors and tax return preparers (P 2-148 to 2-153). 25. Briefly describe the taxpayer relief provisions (P 2-154 to 2-157).

How to Work Through Chapter 2 We recommend the following approach in dealing with the material in this chapter: Administration Of The Department • Read paragraph 2-1 to 2-7 (in the textbook). Filing Requirements For Living And Deceased Individuals • Read paragraph 2-8 to 2-18. • Do Exercise Two-1 (in the textbook) and check the solution in this Study Guide. • Read paragraph 2-19 to 2-21. • Do Exercise Two-2 and check the solution in this Study Guide. Withholdings For Income Tax • Read paragraph 2-22 to 2-28. Instalment Payments For Individuals • Read paragraph 2-29 to 2-44. • Do Exercises Two-3 to Two-5 and check the solutions in this Study Guide. • Do Self Study Problem Two-1 which is available on MyLab and check the solution in this Study Guide. Interest, Penalties And Balance Due Dates For Living And Deceased Individuals • Read paragraph 2-45 to 2-56. • Do Exercise Two-6 and check the solution in this Study Guide. • Read paragraph 2-57 to 2-61. Returns And Payments, Including Instalments, For Corporations • Read paragraph 2-62 to 2-74. • Do Exercises Two-7 and Two-8 and check the solutions in this Study Guide. Balance Due Dates For Corporations • Read paragraph 2-75 and 2-76. • Do Exercise Two-9 and check the solution in this Study Guide. Interest And Penalties For Corporations • Read paragraph 2-77 to 2-80. • Do Self Study Problems Two-2 to Two-4 and check the solutions in this Study Guide. Returns And Payments For Trusts • Read paragraph 2-81 to 2-88. • Do Self Study Problem Two-5 and check the solution in this Study Guide.

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Solutions to Chapter 2 Exercises

General Administrative Issues, Including The "My Account" Service, Assessments, Refunds, And Adjustments To Returns • Read paragraph 2-89 to 2-105. Appeals And Notices Of Objection • Read paragraph 2-106 to 2-121. • Do Exercise Two-10 and check the solution in this Study Guide. • Read paragraph 2-122 to 2-131. • Do Self Study Problem Two-6 and check the solution in this Study Guide. Tax Evasion, Avoidance, And Planning • Read paragraph 2-132 to 2-141. Collection And Enforcement • Read paragraph 2-142 to 2-153. • Do Self Study Problem Two-7 and check the solution in this Study Guide. Taxpayer Relief Provisions • Read paragraph 2-154 to 2-157. To Complete This Chapter • If you would like more practice in problem solving, do the Supplementary Self Study Problems for the chapter. These problems and solutions are available on MyLab. • Review the Key Terms Used In This Chapter in the text book at the end of Chapter 2. Consult the Glossary for the meaning of any key terms you do not know. • Test yourself with the Chapter 2 Glossary Flashcards available on MyLab. • Ensure you have achieved the Chapter 2 Learning Objectives listed in this Study Guide. • As a review, we recommend you view the PowerPoint presentation for Chapter 2 that is on MyLab. Practice Examination • Write the Practice Examination for Chapter 2 that is on MyLab. Mark your examination using the Practice Examination Solution that is also on MyLab.

Solutions to Chapter 2 Exercises Exercise Two - 1 Solution While Mr. Katarski’s 2020 tax return does not have to be filed until June 15, 2021, his tax liability must be paid by April 30, 2021, in order to avoid the assessment of interest. Exercise Two - 2 Solution Sally Cheung’s 2020 tax return must be filed by the later of six months after the date of her death and her normal filing date. As her husband has business income, her normal filing date is June 15, 2021. The later of the two dates would be August 15, 2021, six months after the date of her death. Her final return for 2021 would be due on June 15, 2022. Exercise Two - 3 Solution She is not required to make instalment payments as long as her current year (2020) net tax owing is less than $3,000. Exercise Two - 4 Solution As his net tax owing in the current year and one of the two preceding years is in excess of $3,000, he is required to make instalment payments. The minimum amount would be based on the preceding taxation year’s net tax owing of $1,500, and would be $375 ($1,500 , 4) per quarter. They are due on March 15, June 15, September 15, and December 15.

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Solutions to Chapter 2 Exercises

Exercise Two - 5 Solution The net tax owing amounts can be calculated as follows: 2018 2019 2020

$1,000 ($53,000 - $52,000) $7,000 ($59,000 - $52,000) $4,000 ($64,000 - $60,000)

As the net tax owing exceeds $3,000 in the current year and the first preceding year, instalments are required. The three alternatives for calculating instalment payments are as follows: • • •

Based on the estimate for the current year, the instalments would be $1,000 ($4,000 , 4). Based on the estimate for the preceding year, the instalments would be $1,750 ($7,000 , 4). Based on the second preceding year, the first two instalments would each be $250 ($1,000 , 4). The second two instalments would each be $3,250 {[1/2][$7,000 - ($250)(2)]}. The instalments would total $7,000, the same amount as under the preceding year alternative.

While the first two instalments are lower under the second preceding year alternative, the total for all the instalments under this alternative is $7,000, higher than the $4,000 total under the current year alternative. The current year alternative would be the best. They are due on March 15, June 15, September 15, and December 15. Note, however, that if the estimated taxes payable are below actual taxes payable for 2020, instalment interest may be charged. Exercise Two - 6 Solution Given the size of her net tax owing, ITA 163.1 will not be applicable and there will be no penalties for late instalments. The penalty for late filing will be based on the number of complete months of non-payment, which is two. It will be equal to 7 percent of taxes payable (5 percent, plus 1 percent per month). If in one of the three preceding taxation years she has also late filed, the penalty could be 14 percent (10 percent, plus 2 percent per month) if the CRA has already sent a formal demand to file a return. Interest will be assessed on the deficient instalments, calculated from the date on which the instalment was due and continuing until the balance due date. Interest will also be assessed on the balance owing on her filing date, along with the penalty for late filing. This interest will be assessed for the period May 1 through July 20, 2021. All of the interest will be calculated at the prescribed rate plus 4 percent. Exercise Two - 7 Solution Not Small CCPC If we assume that Madco Ltd. is not a small CCPC, the first two instalments would be due on the last day of January and February 2020. They would be based on the second preceding year and would be $2,667 each ($32,000 , 12). The remaining 10 instalments would be based on the preceding year, less the $5,334 paid in the first two instalments. The amount would be $5,367 [($59,000 - $5,334) , 10] and the instalments would be due on the last day of each month for March to December, 2020. Small CCPC If we assume that Madco Ltd. is a small CCPC, the first instalment would be due on March 31, 2020. The amount would be based on the second preceding year and would equal $8,000 ($32,000 , 4). The remaining three instalments would be based on the preceding year, less the amount paid in the first instalment. These payments would be equal to $17,000 [($59,000 - $8,000) , 3]. These payments would be due on the last days of June, September, and December 2020. Note that when the initial instalment(s) are based on the second preceding year, the total amount of instalments will be the same as when all of the instalments are based on the first preceding year. However, using the second preceding year is preferable in that it provides some deferral of taxes.

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Solution to Self Study Problem Two - 1

Exercise Two - 8 Solution Not Small CCPC If we assume that Fadco is not a small CCPC, the minimum instalments would be based on the estimated taxes payable for the taxation year ending November 30, 2020. The amount would be $1,417 ($17,000 , 12) and the instalments would be due on the last day of each month beginning in December 2019 and continuing to November 2020. Note that if the estimate of tax payable for 2020 is too low, interest may be assessed on the deficiency. Small CCPC If we assume that Fadco is a small CCPC, the instalments would be based on the estimated taxes payable for the taxation year ending November 30, 2020. The amount would be $4,250 ($17,000 , 4). These amounts would be due on the last days of February, May, August, and November 2020. Exercise Two - 9 Solution Radco Inc.’s tax return is due six months after the fiscal year end, on July 31, 2020. Unless Radco is able to claim the small business deduction, the final payment on their taxes is due two months after the year end, on March 31, 2020. If Radco is eligible for the small business deduction, the final payment can be deferred for an additional month, to April 30, 2020, provided the Taxable Income for the preceding taxation year did not exceed $500,000. Exercise Two -10 Solution The notice of objection must be filed by the later of: • •

90 days after the date on the Notice of Reassessment (August 13, 2022); or one year after the due date for filing the return that is being reassessed (April 30, 2022).

The later of these two dates is August 13, 2022.

Solution to Self Study Problem Two - 1 Need For Instalments Instalments are required when an individual’s “net tax owing” exceeds $3,000 in the current year and in either of the two preceding years. In somewhat simplified terms, “net tax owing” is defined as the combined federal and provincial taxes payable, less amounts withheld under ITA 153. Mr. Grafton’s net tax owing figures are as follows: 2018 = $1,700 ($31,500 - $29,800) 2019 = $8,400 ($14,600 - $6,200) 2020 = $3,100 ($27,400 - $24,300) Estimated As Mr. Grafton’s net tax owing in 2020 (the current year) and his net tax owing in 2019 (oneof the two preceding years) is greater than $3,000, he is required to make instalment payments. Amounts If Mr. Grafton bases the first two quarterly payments on the 2018 net tax owing, they would only be $425 each ($1,700 , 4). However, the payments for the last two quarters would be $3,775 each {[$8,400 - (2)($425)] , 2}, resulting in total instalment payments of $8,400. A preferable alternative would be to base the payments on the net tax owing for 2020. These payments would be $775 each ($3,100 , 4), for a total of $3,100. Payment Dates The quarterly payments would be due on March 15, June 15, September 15, and December 15.

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Solution to Self Study Problem Two - 2

Solution to Self Study Problem Two - 2 Case One 1. As the corporation’s tax payable for both the current and the preceding year exceeds $3,000, instalments are required. As the corporation is a small CCPC, instalments will be quarterly. 2. The three acceptable alternatives would be as follows: • • •

Quarterly instalments of $27,405 ($109,620 , 4) based on the current year estimate. Quarterly instalments of $31,290 ($125,160 , 4) based on the first preceding year. One instalment of $25,305 ($101,220 , 4) based on the second preceding year, followed by three instalments of $33,285 [($125,160 - $25,305) , 3] for a total of $125,160.

3. The best alternative in terms of minimum instalments would be four instalments of $27,405, for total payments of $109,620. The instalments are due on March 31, June 30, September 30, and December 31, 2020. Case Two 1. As the corporation’s tax payable for both the current and the preceding year exceeds $3,000, instalments are required. As the corporation is a small CCPC, instalments will be quarterly. 2. The three acceptable alternatives would be as follows: • • •

Quarterly instalments of $27,405 ($109,620 , 4) based on the current year estimate. Quarterly instalments of $26,075 ($104,300 , 4) based on the first preceding year. One instalment of $25,305 ($101,220 , 4) based on the second preceding year, followed by three instalments of $26,331.67 [($104,300 - $25,305) , 3] for a total of $104,300.

3. The best alternative would be one payment of $25,305, followed by three payments of $26,331.67. While the total instalments are the same, $104,300, in both the second and third alternatives, the third alternative is preferable because the first payment is lower. This provides a small amount of tax deferral. The instalments are due on March 31, June 30, September 30, and December 31, 2020. Case Three 1. As the corporation’s tax payable for both the current and the preceding year exceeds $3,000, instalments are required. As the corporation is not a small CCPC, monthly instalments are required. 2. The three acceptable alternatives would be as follows: • • •

Monthly instalments of $9,135 ($109,620 , 12) based on the current year estimate. Monthly instalments of $10,430 ($125,160 , 12) based on the first preceding year. Two monthly instalments of $8,435 ($101,220 , 12) based on the second preceding year, followed by 10 monthly instalments of $10,829 {[$125,160 - (2)($8,435)] , 10} for a total of $125,160.

3. The best alternative in terms of minimum instalments would be 12 instalments of $9,135, resulting in a total of $109,620 in instalment payments. The instalments would be due on the last day of each month, beginning in January 2020. Case Four 1. As the corporation’s tax payable for both the current and the preceding year exceeds $3,000, instalments are required. As the corporation is not a small CCPC, monthly instalments are required. Study Guide for Canadian Tax Principles 2020 - 2021

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Solution to Self Study Problem Two - 3

2. The three acceptable alternatives would be as follows: • • •

Monthly instalments of $9,135 ($109,620 , 2) based on the current year estimate. Monthly instalments of $8,691.67 ($104,300 , 12) based on the first preceding year. Two monthly instalments of $8,435 ($101,220 , 12) based on the second preceding year, followed by 10 monthly instalments of $8,743 {[$104,300 - (2)($8,435)] , 10} for a total of $104,300.

3. The best alternative would be 2 payments of $8,435, followed by 10 payments of $8,743. While the total instalments are the same, $104,300, in both the second and third alternatives, the third alternative is preferable because the first two payments are lower. As indicated in Case Two, this provides a small amount of tax deferral. The instalments would be due on the last day of each month, beginning in January 2020.

Solution to Self Study Problem Two - 3 Case One 1. The individual’s net tax owing in each of the three years is as follows: 2018 = Nil ($72,300 - $73,700) 2019 = $6,200 ($89,400 - $83,200) 2020 = $3,300 ($78,300 - $75,000) As the net tax owing exceeds $3,000 in the current year and one of the two preceding years, instalments are required. 2. The three alternatives would be: • • •

Quarterly instalments of $825 ($3,300 , 4) based on the current year estimate. Quarterly instalments of $1,550 ($6,200 , 4) based on the first preceding year. Based on the second preceding year, the first two instalments would be nil. The remaining two instalments would be $3,100 each [($6,200 - Nil) , 2] for a total of $6,200.

3. The best alternative to minimize instalments would be four quarterly instalments of $825 for a total of $3,300. The instalments are due on March 15, June 15, September 15, and December 15. Case Two 1. The individual’s net tax owing in each of the three years is as follows: 2018 = $7,200 ($72,300 - $65,100) 2019 = Nil ($89,400 - $90,100) 2020 = $6,400 ($78,300 - $71,900) As the net tax owing exceeds $3,000 in the current year and one of the two preceding years, instalments are required. 2. The three alternatives would be: • • •

Quarterly instalments of $1,600 ($6,400 , 4) based on the current year estimate. Quarterly instalments of nil based on the first preceding year. Two quarterly instalments of $1,800 ($7,200 , 4) based on the second preceding year. No further instalments would be required.

3. The best alternative would be quarterly instalments of nil based on the first preceding year.

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Solution to Self Study Problem Two - 4

Case Three 1. As the corporation’s tax payable for both the current and the preceding year exceeds $3,000, instalments are required. As the corporation is a small CCPC, instalments will be quarterly. 2. The three acceptab...