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YORK UNIVERSITYMID-TERM EXAM – FALL 2019AP/ADMS 4561 TAXATION OF PERSONAL INCOME IN CANADANumber of Questions: 7 (Questions 1,2,3 for posting)Number of Pages: 12 (please ensure you have all pages before you start)Time allowed: 3 hours (100 marks) Instructions (Please read before you start the test):...

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YORK UNIVERSITY MID-TERM EXAM – FALL 2019 AP/ADMS 4561 TAXATION OF PERSONAL INCOME IN CANADA Number of Questions:

7 (Questions 1,2,3 for posting)

Number of Pages:

12 (please ensure you have all pages before you start)

Time allowed: 3 hours (100 marks) ______________________________________________________________ Instructions (Please read before you start the test): 1. Time allotments are provided for each question as a guide to ensure that you spend the appropriate amount of time on each question. 2. The exam must be prepared in ink and “whiteout” not used for the exam to be considered for remarking. 3. Questions 1, 2 and 3 are to be answered in your solution booklet. ONLY ONE SOLUTION BOOKLET IS ALLOWED. If you feel you require more information in a fact situation, outline the exact nature of the information CLEARLY and specify how it would affect your decision, but do not contradict facts or assume the abnormal. 4. Questions 4, 5, 6 and 7 are to be answered on this question paper. You must hand in the question paper inside the solution booklet. 5. The prescribed rate is 1% for the first quarter of 2018. The prescribed rate each quarter thereafter is 2%. 6. You may use a non-programmable calculator and the Exam Information Sheet included with this exam. You cannot use a dictionary or any other aids. 7. This exam contains confidential and proprietary information and York University wishes to ensure that the said information is treated in strictest confidence until it is posted on the course website. The undersigned shall not disclose, release, or communicate in whole or in part any of the said information to any third party at any time. Any such disclosure, release, or communication shall be considered a breach of this agreement and will be considered academic dishonesty resulting in the final course grade of F. By writing your name below, you acknowledge your understanding of this.

_______________ LAST NAME

_______________ FIRST NAME

_____________ STUDENT #

__________ SECTION #

YOU MUST HAND IN THIS QUESTION PAPER. DO NOT TAKE IT APART Fall 2019 – ADMS 4561 Midterm

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Question 1 (25 marks; suggested time 45 minutes) Lucy is an employee of Chocolate Truffles Co. (“CTC”), a Canadian controlled private corporation (“CCPC”) that specializes in custom home-made chocolate truffles. Until early 2019, Lucy worked in their offices in Northern Ontario. On March 1, 2019, Lucy was promoted to Director of Sales and moved to Toronto to begin her new role. Lucy was hesitant about the move at first, as the responsibilities involve more travel. However, Lucy sees the potential to expand the business, as the market in a larger city will present more opportunity. Lucy is single and does not have any children. Lucy incurred the following moving expenses in February 2019:  Travel from Northern Ontario (assume 410 km) to Toronto (1 day): o Car expenses- gas $45 o Meals $30  Moving van $1,250 As of December 31, 2019, Lucy had not sold her home in Northern Ontario, as she wants to be sure about living in a big city. She began renting an apartment in Toronto in March for $2,100 a month. Lucy’s base salary for January through February totaled $6,000. She did not earn any other form of remuneration from CTC for these two months. Lucy’s pay slips in respect of her March 1 to December 31, 2019 earnings from CTC show the following amounts:  Salary $80,000  Commissions $12,000  Car allowance ($300 per month) $3,000  Travel allowance (non-vehicle) $3,800 Effective March 1, 2019, Lucy incurs various expenses in earning her sales commission income, which she is required to pay under her employment contract. CTC will provide Lucy with a Form T2200 certifying that she is required to pay for all of the expenses detailed below. Lucy travels to various chocolate conventions and hosts private functions across Canada. Her 2019 travel costs included:  Air Travel $5,500  Accommodation $9,500  Meals for herself $2,500 Fall 2019 – ADMS 4561 Midterm

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Lucy also uses her personal car for work for local travel. She drove a total of 45,000 kilometers from March to December 2019, of which 30,000 were for employment purposes. Lucy purchased a new car for cash on March 15, 2019 for $55,000. During March to December, Lucy paid $2,800 for gas, $2,000 for insurance, $900 for new snow tires and $500 for business parking. Her car license renewal was $120. In 2019, Lucy paid $1,000 in advertising expense relating to gift bags for guests that attended trade shows. Lucy spent $250 on office supplies, and $1,200 on cell-phone air time relating to employment. According to Lucy’s T4, the following amounts were deducted at source from her pay:  Registered pension plan contributions $5,000  CPP & EI $3,000 In 2019, Lucy paid $900 for prescription eyeglasses, $700 for prescription drugs, and $1,200 in dental fees. None of these fees were reimbursed to Lucy.

REQUIRED: Compute Lucy’s minimum federal taxable income and federal tax payable for 2019, claiming the maximum allowable deductions and credits. Ignore HST/GST. Show all calculations. Also provide a brief explanation for any items omitted from your calculation. You do not have to cite any sections of the Income Tax Act.

Fall 2019 – ADMS 4561 Midterm

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Question 2 (18 marks; suggested time 32 minutes) Ace Construction Ltd. (“ACL”) is a Canadian-controlled private corporation (“CCPC”) that specializes in residential construction. The company is owned by three brothers who are all residents for Canadian tax purposes. The brothers all work in the business. The following information pertains to ACL for its December 31, 2019 fiscal year-end: 1. Its Canadian active business income was correctly calculated as $1,200,000. 2. ACL had a taxable capital gain of $5,000. 3. The company has investments in two CCPCs: a. In 2018, ACL incorporated a wholly owned subsidiary, Paving Co. (“PC”), to hold most of the equipment used in ACL’s operations. The brothers run a very small paving operation out of PC. In 2019, PC’s taxable income was $550,000 but it was agreed that ACL would claim the entire annual business limit for the purposes of the small business deduction. b. In 2019, ACL received a $10,000 eligible dividend from Landscaping Ltd. (“LL”). As a result of the dividend payment, LL received a dividend refund of its eligible refundable dividend tax on hand (“ERDTOH”) in the amount of $1,000. ACL owns 8% of LL. The remaining 92% of LL is owned by unrelated parties. 4. The company has a $20,000 non-capital loss carryforward balance from 2015. 5. As at December 31, 2018, the company has a closing balance in its general rate income pool (“GRIP”) in the amount of $450,000. In 2018, ACL paid an eligible dividend of $60,000 to the brothers. 6. The company does not have opening balances in its ERDTOH account, its noneligible refundable dividend tax on hand (“NERDTOH”) or capital dividend account (“CDA”). REQUIRED Compute the following for ACL for 2019: Its minimum net income, taxable income; Federal Part I tax; Refundable Part I and Part IV tax. Compute the balances at December 31, 2019 in ACL’s CDA, GRIP, NERDTOH and ERDTOH. Show all calculations.

Fall 2019 – ADMS 4561 Midterm

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Question 3 (10 marks; suggested time 18 minutes) You are a CPA in the tax group of your firm. It is October 6, 2019, and you received the following e-mail from a client: Good afternoon, CPA. My team is putting together the necessary information for the purposes of preparing the tax return for our year end. As you know, Designz Co. (“DC”) is a Canadian controlled private corporation (“CCPC”) that provides custom neon signs. We are in our first year of operations, and we have calculated a preliminary figure of net income for tax of $350,000! We had a couple enquires from our senior employees about the amount of income tax etc. withheld from their pay cheques. Many have heard from their freelance friends in the design industry that they are treated as contractors, so nothing is withheld from their pay. I am worried that we are going to lose some good employees, so I want to treat them as contractors; plus, I will not have the administrative burden of doing payroll for these individuals- so it’s a win-win! We are in the middle of drafting an agreement that will state that the designers will be self-employed. The contracts will be indefinite. The designers will be paid an hourly rate (determined based on their seniority), and DC will not take any source deductions. The contractors will have to register for GST/HST and invoice DC monthly and some will incorporate. It will be mandatory that the contractors purchase their own computer, but DC will provide them with a license for the design software (to be used for DC clients only). Due to the short-term nature of our projects, the contract will not prevent the contractors from having other assignments. However, we at DC will dictate how much time will be spent on projects relating to DC clients. I suspect that most of the contractors will work from our office, especially on days when they are meeting with clients. The contractors will still be entitled for certain benefits offered to our employees under our company fitness and wellness plan. Everyone has a great time at our year-end holiday parties, so we will invite the contractors to company-wide events as well. Given these facts, is my objective of treating these individuals as contractors met? Oh, and before I forget, we had a significant amount of capital expenditures incurred in the year since it is our first year of business. We incurred a significant amount of legal costs associated with issuing our second round of preferred shares. These costs totaled $25,000 and I treated this as 100% deductible. Is this correct? If not, what adjustment to I need to make to my $350,000 net income for tax figure above? REQUIRED: Prepare a memorandum in proper format to Jodi responding to her concerns. You may use point form in the body of the memorandum. You do not have to cite any sections of the Income Tax Act. Fall 2019 – ADMS 4561 Midterm

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Question 1 (25 marks; suggested time 45 minutes) George is an employee of Vandelay Industries Inc. (“VII”), a Canadian public company that specializes in selling medical supplies. George recently moved to Toronto from Sudbury (400 kilometers), to begin his job at VII on February 1, 2018. George is single. George’s incurred the following moving expenses in January 2018:  House hunting trips $500  Travel from Sudbury to Toronto (1 day): o Car expenses- gas $50 o Meals $25  Moving van $1,500  Commission and legal costs- Sudbury home $15,000  Legal fees/land transfer tax- Toronto home $18,000 George’s base salary from his previous employer in Sudbury totaled $5,000 for the month of January 2018. George’s pay slips in respect of his February to December 2018 earnings from VII show the following amounts:  Salary $120,000  Commissions $18,000  Car allowance ($400 per month) $4,400  Travel allowance (non-vehicle) $3,200 George incurs various expenses in earning his commission income, which he is required to pay under his employment contract. VII will provide George with a Form T2200 certifying that he is required to pay for all of these expenses detailed below. George travels to various hospitals and private health care facilities across Ontario and Quebec. His 2018 travel costs included:  Accommodation $11,500  Meals for himself $2,300  Air Travel $6,500 George also uses his personal car for local travel. He drove a total of 60,000 kilometers from February to December 2018, of which 30,000 were for employment purposes. George purchased a new car for cash on December 1, 2018 for $45,000. During the year, George paid $2,900 for gas, $2,100 for insurance, $800 for new snow tires, and $950 for business parking. His car license renewal was $120.

Fall 2019 – ADMS 4561 Midterm

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In 2018, George paid $1,200 in advertising expense relating to marketing new medical supplies. George often took doctors of the hospitals he was servicing out for dinners. He spent $3,500 on these dinners. George spent $200 on other supplies, and $1,100 of cell-phone air time. According to George’s T4s, the following amounts were deducted at source from his pay:  Income taxes $20,000  Registered pension plan contributions $5,000  CPP & EI $3,000 In 2018, George paid $1,200 for prescription eyeglasses, $500 for prescription drugs, and $1,800 in dental fees. None of these fees were reimbursed to George.

REQUIRED: Compute George’s minimum federal taxable income, federal tax payable and the balance due for 2018, claiming the maximum allowable deductions and credits. Ignore HST/GST. Show all calculations. Also provide a brief explanation for any items omitted from your calculation. You do not have to cite any sections of the Income Tax Act.

Fall 2019 – ADMS 4561 Midterm

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Question 2 (18 marks; suggested time 32 minutes) Magic Co. (“MC”) is a Canadian-controlled private corporation (“CCPC”) that specializes in comedy show performances across Canada. MC has over 50 magicians on staff, that are trained under the MC brand by its sole owner, Rob. The following information pertains to MC for its December 31, 2018 fiscal year-end: 7. Its Canadian active business income was correctly calculated as $800,000. 8. The company had a 10% investment in Performance Co. (“PC”), a CPPC. In 2018, MC received a $20,000 eligible dividend from PC. As a result of the dividend payment, PC received a dividend refund in the amount of $10,000. On November 1, 2018, MC sold the investment in PC, which triggered a capital gain in the amount of $60,000. MC had no other capital gains or losses to date. 9. On December 30, 2018, MC paid Rob a $30,000 eligible taxable dividend. 10. The company has $20,000 non-capital loss carryforward balance from 2013. On December 30, 2017, MC paid Rob a $10,000 eligible dividend, and received a dividend refund of $3,800. MC’s ending 2017 balance in its general rate income pool (“GRIP”) and refundable dividend tax on hand (“RDTOH”) accounts are $40,000 and $15,000, respectively. Rob also owns 30% of Wizard Supply Ltd. (“WSL”), a company that distributes magic show supplies to various Canadian online retailers. WSL was incorporated on January 1, 2018 by Rob’s wife, Hanna, who owns the remaining 70% of the company. Because 2018 is WSL’s first year of business, WSL only earned $50,000 of taxable income, equal to the amount of its small business deduction claim on its 2018 tax return.

REQUIRED Compute the following for MC for 2018: Its minimum net income, taxable income; Federal Part I tax; Refundable Part I and Part IV tax; and Dividend refund. Compute the balances at December 31, 2018 in MC’s RDTOH, CDA and GRIP accounts. Show all calculations.

Fall 2019 – ADMS 4561 Midterm

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Question 3 (10 marks; suggested time 18 minutes) s19 You are a CPA in the tax group of your firm. It is June 2, 2019, and you received the following e-mail from a client: Good afternoon, CPA. I received your information from my husband, Rob, after the impressive work your firm completed in regards to the 2018 corporate tax filing for Magic Co. (“MC”). As you know, I own 70% of the common shares of Wizard Supply Ltd. (“WSL”), a company I started early last year. Rob owns the remaining 30% of the common shares. Currently, I am running WSL out of our home in Toronto, which worked well in the first year of operations. However, I am expecting that once we fully launch WSL’s online platform I will need more office space. Currently, I am WSL’s sole employee. Rob has taken over the only office space we have in our home, as the success of MC has required Rob to hire more employees. Instead of renewing MC’s lease, our previous accountant suggested that MC loans its excess cash to WSL, and WSL will purchase the new office building. MC will then pay WSL rent for the use of the building, which I correctly understand is deductible to MC for tax purposes. This is what we want to do. However, my previous accountant said something about WSL becoming a specified investment business if it earns rent. Can you please explain this to me? Will the rental income be subject to the same rate of tax as the business income WSL currently earns? The building that we have put an offer on will require some renovations. The building will require a new roof, since it has never been repaired by the previous owners. I guess this is why the building was listed at an affordable price! We also want to fix the landscaping around the front doors to make the building more accessible. There is not much work required to fix up the office space inside, except to replace the carpet inside the lobby. We do not even have to paint! Can you please explain how the purchase of the building and the above renovations should be treated for tax purposes? On a completely different topic, I am launching WSL’s website next week and I unsure how to classify the $10,000 purchase of the domain name. WSL will also have to pay $10 a month in web-hosting costs to GoDaddy.com. Can you let me know how these costs should be treated for tax purposes as well? Thanks for your help! Hanna REQUIRED: Prepare a memorandum in proper format to Hanna responding to her concerns. You may use point form in the body of the memorandum. You do not have to cite any sections of the Income Tax Act. Fall 2019 – ADMS 4561 Midterm

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