Solution Chapter 3 , 4 and 5 PDF

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Chapter 3 Solution 1: Auto Benefits—Company-Owned Versus Leased Driving the car more than 50% for business purposes entitles Lisa to a reduced standby charge and the alternative operating benefit of 50% of the standby charge. Business Driving 40% 60% Personal kilometres 14,400 9,600 Business kilometres 9,600 14,400 Total 24,000 24,000 Reduced standby and operating benefits A = personal use kilometres = B = 1,667 km x (365/30) = C = original cost including HST = $35,000 x 1.13 = D = available days/30 = E = lease payments including HST = $750 x 12 x 1.13 = F = insurance portion of lease payments = Option 1 – Company-Owned Standby Charge: 40% Business (50%) A/B x [2% x (C x D) + 2/3 (E – F)] = 9,600/20,004 x [2% x ($39,550 x 12)] = Operating Benefit: 40% Business (50%) Lower of 50% of standby charge (50% x $4,555 = $2,278) or per km benefit ($0.26 x 9,600 = $2,496)

No

Yes

14,400 20,004 $39,550 12 $10,170 0

9,600 20,004 $39,550 12 $10,170 0

$9,492 $4,555

3,744

2,296 Total benefit = Cost at a tax rate of 41% = Difference Option 2 – Company Leased Standby Charge: 40% Business (50%) A/B x [2% x (C x D) + 2/3 (E – F)] = 9,600/20,004 x [2/3 x ($10,170 – 0)] = Operating Benefit: 40% Business (50%) Lower of 50% of standby charge (50% x $3,254 = $1,627) or per km benefit ($0.26 x 9,600 = $2,496)

$13,236 $6,851 $5,426 $2,809 $2,617

$6,780 $3,254

3,744

1,627 Total benefit = Cost at a tax rate of 41% =

$10,524 $4,315

$4,881 $2,001

Difference

$2,314

Based on this analysis, Lisa would prefer that the company lease the car regardless of whether she uses it 60% or 40% for business.

Solution 2: Stock option—Comparing CCPC to Public Company For employee stock options, the amount and nature of the income does not vary with the type of corporation; only the timing varies Use this drawing to show the relationship among the values.

1.

Calculate benefit – public company stock option Amount of benefit to report as employment income: 1,000 shares x ($35 - $30) = $5,000 When is this reported? As a public company, this employment benefit is reported in the year that the option is exercised. Impact on ACB The amount of the employment income reported increases the ACB of the shares. ACB = 1,000 x $30 + $5,000 = $35,000 The $35,000 represents the total tax-paid cost of the shares which should be returned tax free on a disposition, because tax has already been paid on that amount.

2.

Calculate benefit – private company stock option Amount of benefit to report as employment income: 1,000 shares x ($35 - $30) = $5,000 When is this reported? As a private company, this employment benefit is reported in the year that the shares are sold. Impact on ACB The amount of the employment income reported will increase the ACB of the shares in the year that it is reported, i.e., in the year that the shares are sold. This new ACB represents the total tax-paid cost of the shares which should be returned tax free on a disposition, because tax has already been paid on that amount.

Solution 2: Stock option—Comparing CCPC to Public Company For employee stock options, the amount and nature of the income does not vary with the type of corporation; only the timing varies Use this drawing to show the relationship among the values.

3.

Calculate benefit – public company stock option Amount of benefit to report as employment income: 1,000 shares x ($35 - $30) = $5,000 When is this reported? As a public company, this employment benefit is reported in the year that the option is exercised. Impact on ACB The amount of the employment income reported increases the ACB of the shares. ACB = 1,000 x $30 + $5,000 = $35,000 The $35,000 represents the total tax-paid cost of the shares which should be returned tax free on a disposition, because tax has already been paid on that amount.

4.

Calculate benefit – private company stock option Amount of benefit to report as employment income: 1,000 shares x ($35 - $30) = $5,000 When is this reported? As a private company, this employment benefit is reported in the year that the shares are sold. Impact on ACB The amount of the employment income reported will increase the ACB of the shares in the year that it is reported, i.e., in the year that the shares are sold. This new ACB represents the total tax-paid cost of the shares which should be returned tax free on a disposition, because tax has already been paid on that amount.

Solution 4: Employee Benefits—Multi-part Explain the tax consequences to the employees of each of the following options. 1.

Free parking. a. Generally, employer-provided parking is considered a taxable benefit. However, it may be difficult to determine the value of the benefit if it is an open parking lot. If it is a reserved spot that is rented at a monthly rate, then the cost of the spot including HST will be included as a taxable benefit.

2.

Wedding or birthday gifts of up to $200. a. Cash and near-cash gifts are always a taxable benefit. b. Non-cash gifts with a combined total value of up to $500 annually can be received. If the gifts total more than $500 then the excess is taxable.

3.

All-expense paid holiday won as part of a sales contest. a. This is considered an award for job performance and is taxable.

4.

The employee uses frequent flyer points for a personal trip. These points were earned as a result of business trips. a. This is no longer considered a taxable benefit, unless the points are converted to cash.

5.

The company provides an employee discount of 24% on products sold by Auto Supply. a. Discounts are generally not considered to be taxable benefits. b. However, if the price is below the company’s cost then there will be a taxable benefit for the difference between cost and the price charged.

6.

The company pays to provide financial counselling for all vice presidents including the preparation of their personal tax returns. a. If the financial counselling is related to re-employment or retirement, then there is no taxable benefit. Otherwise it is taxable. [6(1)(a)] b. Tax return preparation is a taxable benefit. [Income Tax Folio S2-F3-C2]

7.

The company will pay for annual professional dues for employees, for example, for accountants and lawyers. a. If the professional membership is a requirement of employment, then there is no taxable benefit.

Solution 5: Employee Loans, Car Expenses

Benefit would be the sum of: (A)

Car loan—prescribed rates 1st quarter 2nd quarter 3rd quarter 4th quarter (B)

Home purchase loan

7% × $15,000 × 90/365 = 6% × $15,000 × 91/365 = 8% × $15,000 × 92/365 = 7% × $15,000 × 92/365 =

$259 224 302 265

$ 1,050

(1)

The lesser of the prescribed rate at the time of the loan (i.e., 7%) and the prescribed rate per quarter. 1st 2nd 3rd 4th

7% × $100,000 × 90/365 = 6% × $100,000 × 91/365 = 7% × $100,000 × 92/365 = 7% × $100,000 × 92/365 =

$1,726 1,496 1,764 1,764

$ 6,750

(C) Other loan 1st 2nd 3rd

7% × $10,000 × 90/365 = 6% × $10,000 × 91/365 = 8% × $10,000 × 92/365 = 7% × $10,000 × 92/365 =

4th

$173 150 202 176

$ 701 $8,501

Less amounts paid(2) (a) 6% × $15,000 × 365/365 . . . . . . . . . . . . . .. . (b) 4% × $100,000 × 365/365 . . . . . . . . . . . . . .. . (c) 7% × $10,000 × 365/365 . . . . . . . . . . . . . .. .

$ 900 4,000 700

5,600 $ 2,901

The Act would deem $150 of the car loan interest ($1,050 - $900) to be paid in the year and, therefore, eligible for an interest deduction, since the interest was deemed to be paid within 30 days of the year-end, as required. An Interpretation Bulletin indicates that the deemed interest expense must be prorated for employment use. 27,000 km 45,000 km

ITA: 80.5 ITA:8(1)(j), 80.4(1)(c)

IT-522R, par. 27

× $150 = $90

ITA:8(1)(j) The interest deduction provision would deny a prorated deduction of the $900 paid on January 15 of the following year, since it was not paid in the taxation year in question. However, this amount would be eligible for a deduction in the following taxation year to the extent of the business use.

The interest limitation restricts the interest to the lesser of (a) $90 and (b) $300 × 365/30 × 27,000/45,000 = $2,190.

ITA:67.2

—NOTES TO SOLUTION (1) ITA:110(1)(j), 248(1) If this loan had been as a consequence of an employment relocation, Division C of the Act would have provided a deduction for five years, equal to the imputed interest benefit on the first $25,000 of the ‘‘home relocation loan’’, as defined. As a result, in this particular case, the overall benefit on the housing loan would have been reduced by $1,688 (i.e., $25,000/$100,000 of $6,750). See Chapter 10 for a complete discussion of this provision. The ‘‘lesser of’’ comparison is made on a quarter-by-quarter basis. (2)

The interest benefit is calculated on an aggregate basis. Any excess interest payment on one loan effectively reduces the deemed interest benefit on the other loans.

ITA:80.4

Solution 6: Commission Expenses and Limitation Reille is limited in the amount he can claim to the $24,000 he made in commission income. Sales expenses (paragraph 8(1)(f)): Reille is permitted to claim 50% of the entertainment meals and 50% of the out-of-town meals if he was out of town for more than a 12-hour period when he had these meals (subsection 8(4)). Reille may claim the $18,000 spent on hotels and airfare. Professional dues of $250 are deductible under paragraph 8(1)(i). Hotel and airfare ……………………................. Out-of-town meals (4,000 X 50%) ……………. Entertainment meals (2,500 X 50%) ………….. Total sales expenses (paragraph 8(1)(f)) ……… Professional dues (paragraph 8(1)(i)) ………… Total employment expenses allowable ………..

$18,000 2,000 1,250 21,250 250 $21,500

The $21,250 is less than the $24,000 made in commissions so it, plus the $250 for professional dues, is deductible as employment expenses. The cost of the notebook computer is not deductible since it is a capital asset. Also, CCA is not allowed on the computer because the only CCA that can be claimed against employment income is for automobiles and aircraft.

Solution 11: Calculate Employment Income—Benefits, Stock Options Employment Income Section 5 — Gross salary Section 6 — Provincial mandatory public health care (Note 1) Hawaii trip Section 7 — Stock option benefit (Note 2) Section 8 — Registered pension plan Income from employment

$59,000 0 6,000 7,000 (3,000) $69,000

Notes: 1. The CRA states in Income Tax Folio S2-F3-C2, Benefits and Allowances Received from Employment that public health care premiums for a provincial hospital insurance plan or a provincial medical care insurance plan that the employer is required to pay by law are not a taxable benefit. A provincial employer health tax is not considered to be a taxable benefit either. 2.

Stock option benefit FMV at exercise date Employee cost Taxable benefit

= =

$19 × 1,000 $12 × 1,000

= =

$19,000 (12,000) $ 7,000

Since Erin exercised her option in a public corporation, she must report the stock option benefit in 2018. 3. 4. 5. 6. 7. 8.

The charitable donations, CPP, and EI are personal credits and not deductions. The private dental plan is specifically excluded from income. The reimbursement of moving expenses will reduce her moving expense claim; a reimbursement of actual costs is not a taxable benefit. The club membership dues are primarily for the benefit of her employer. The bonus declared and not paid will be taken into income when received. The hard hat and safety glasses are not for personal use.

Solution 17: Calculate Employment Income—Benefits (A) Employment income Salary — gross.............................................................................................. $ 80,000 Group term life insurance.............................................................................. 250 Trip to Europe................................................................................................ 6,000 Income protection payments ($12,000 – $2,300)........................................... 9,700 Stock option benefit (1,000  ($4.50 – $2.00))............................................. 2,500 $ 98,450 Less: Registered pension plan........................................................................ $ 5,500 Professional fees.................................................................................... 800 (6,300) Employment income...................................................................................... $ 92,150

ITA Reference 5 6(1)(a) 6(1)(a) 6(1)(f) 7 8(1)(m), 147.2(4)(a) 8(1)(i)

(B) (i) Private health plans such as those offered by Sun Life and Liberty Mutual are statutory exemptions [par. 6(1)(a)]. In addition, Health Services tax levies, such as those in Manitoba, Ontario, and Newfoundland, are not taxable benefits. (ii) Membership fees paid by the employer for social clubs may not be included in the income of the employee if the membership was principally for the employer’s advantage rather than employee’s [Income Tax Folio S2-F3-C2 ] (iii) There is no stock option benefit when the option is granted. The sale of shares in December results in a capital gain of $0.50 per share (i.e., $5.00 – $4.50), which is not employment income. (iv) Registered retirement savings plan — Subdivision e, not Subdivision a deduction. (v) Income tax not deductible — Subsection 8(2). (vi) Charitable donation — Division E tax credit, (vii) CPP contributions and El premiums are tax credits deductible under Division E.

(C)Authors’ Note: The following problem includes GST/HST implications. Students should review Chapter 20 of the textbook, Goods and Services Tax (GST) / Harmonized Sales Tax(HST), before attempting this problem. HST rebate 13

/113 of professional fees (13/113  $800)

Par. 6(8)(c) employment income inclusion in year of receipt of rebate

$92 $92

Solution 21: Calculate Employment Income—Comprehensive Benefits (A) Employment income Salary — Gross.......................................................................................... Disability payments — Amount received.................................................. $ 1,600 Less amount paid (2015–2018).................................................................. (350) Preparation of 2017 income tax return(1) ................................................... MBA tuition fees(1)..................................................................................... Director’s fee............................................................................................. Birthday gift(2)............................................................................................ Imputed interest(3)...................................................................................... Gas allowance ($250  12)....................................................................... Standby charge(4)........................................................................................ Car operating costs(4).................................................................................. Bahamas condo — Fair market value(1) ..................................................... $ 500 Less amount paid....................................................................................... 100

$

90,000 1,250 424 1,000 2,000 200 56 3,000 9,240 4,000 400 $111,570

Sec. 5 Par. 6(1)(f) Par. 6(1)(a) Par. 6(1)(a) Par. 6(1)(c) Par. 6(1)(a) Ssec. 6(9); 80.4 Par. 6(1)(b) Par. 6(1)(e); 6(2) Par. 6(1)(k) Par. 6(1)(a)

(B) Omissions (i) Income taxes are not deductible under section 8 [ssec. 8(2)]. (ii) CPP and El provide tax credits under Division E. (iii) Group accident disability insurance premiums are not deductible under section 8 [ssec. 8(2)]. (iv) Employer-paid group accident disability insurance premiums are not a taxable benefit [par. 6(1)(a)]. (v) The employer-paid retirement planning advice is not a taxable benefit [clause 6(1)(a)(iv)(B)]. (vi) The employer-paid tuition for the two-day computer workshop is not a taxable benefit [Income Tax Folio S2-F3-C2]. (vii) A 30% employee discount which is available to all employees is not a taxable benefit, since the price is not below cost [Income Tax Folio S2-F3-C2]. (viii) According to ITTN No. 40, frequent-flyer points are not considered to be taxable benefits. (See ¶3,140 of the text) (C) If there was no company-owned car provided to Anita, there would be no standby charge or operating cost benefit computed under paragraph 6(1)(k). Instead, paragraph 6(1)(l) would apply to compute Anita’s operating cost benefit as:

16,000 km ×$2 ,920=$1 , 869 25,000 km —NOTES TO SOLUTION (1) These issues are discussed in Income Tax Folio S2-F3-C2, Benefits and Allowances Received from Employment. (2) To meet the administrative exception, the gift cannot be cash or near cash. This was a cash gift. $ 33 (3) 2%  $8,000  76/365....................................................................................................................... 20 1%  $8,000  9l/365....................................................................................................................... 60 3%  $8,000  92/365....................................................................................................................... 1%  $8,000  92/365....................................................................................................................... 20 $ 133 Less: 1%  $8,000  35l/365............................................................................................................. (77) $ 56

(4) Standby charge [par. 6(1)(e) and ssec. 6(2)]:

20,004 km ×[ ( 2 %×12) ×$ 38 ,500] =$ 9 , 240 20,004 km Operating cost including HST benefit [par. 6(1)( k)]: 16,000 km  $0.26 = $4,160 Anita is not eligible for either the standby charge reduction or the subparagraph 6(1)( k)(iv) election method since she does not use the automobile more than 50% for business purposes, which is required for these provisions.

Chapter 4 Solution 11: Schedule 1 Reconciliation ITA Reference Net income per financial statements Add (deduct): Legal Personal expenses of shareholder Advertising Interest expense Amortization Meals Exempt income CCA Bonus paid after 180 days after year end Lease termination payment Lease termination payment (Note 1) Financing costs Financing costs (Note 2)

$ 740,000 18(1)(e) 18(1)(a) 19.1(1) 18(1)(t) 18(1)(b) 67.1(1) 18(1)(c) 20(1)(a) 78(4) 18(1)(q) 20(1)(z) 18(1)(b) 20(1)(e)

Business income for tax purposes

15,000 30,000 10,000 5,000 80,000 20,000 50,000 (14,210) 80,000 100,000 (9,918) 30,000 (6,000) $1,129,872

Notes: 1. Paragraph 20(1)(z) applies since the property is still owned at the end of the year. At the time the lease is cancelled there are 1,825 days remaining in the lease term (five years × 365 days, ignoring leap years). The number of days remaining in the current year to June 30 is 181 days (from January 1 to June 30). The calculation is as follows: 181/1,825 × $100,000 = $9,918 2.

$30,000 × 20% = $6,000. Paragraph 20(1)(e) limits the deduction for financing costs to 20% per year.

Solution 13: Schedule 1 Reconciliation Net income Add: Accounting amortization (paragraph 18(1)(b)) Tennis club dues (paragraph 18(1)(l)) Political donations (paragraph 18(1)(n)) Charitable don...