Gale Hawthorne has Come to You for Some Help in Computing His Income: Canadian Federal Income Tax Assignment, CU, Canada

University Carleton University (CU) Canada
Subject Canadian Federal Income Tax

Question 1

Gale Hawthorne has come to you for some help in computing his income. He is trying to plan for the payment of his 2019 taxes and wants an idea as to how much that tax bill will be. He has provided you with the following details regarding his investments for 2019.

Employment

Gale earned a $75,000 salary from his employment at HG Co.

Banking

He has a chequing and savings account that is both joint with his wife, Rose (funds contributed, and used by both). The total interest earned is $100.

GIC

He has a 5% three-year semi-annual compound-interest GIC purchased April 1, 2018, for $10,000. Interest accruing (none has been paid out) on the GIC has been as follows:

April 1, 2018, to September 30, 2018………………………………………….. $250

October 1, 2018, to December 31, 2018……………………………………….. 129

January 1, 2019, to March 31, 2019……………………………………………….. 126

April 1, 2019, to September 30, 2019……………………………………………. 263

October 1, 2019, to December 31, 2019……………………………………….. 136

Shares

He has owned HG shares for a number of years. HG is a public Canadian company and his employer. The shares paid total eligible dividends of $0.60 per share in 2019. On October 1, 2019, after the dividend payments for the year, Gale sold 800 shares for $28.125 per share for total proceeds of $22,500. Brokerage fees are $200. The history of transactions is as follows:

February 2001 He purchased 1000 shares for $8 per share under his employer’s stock option plan. At the time of the exercise, the shares were valued at $10.50 per share.

June 2005 These shares were split 2 for 1.

July 2005 He purchased an additional 600 shares for $12.50 per share.

Gale also owns shares of D12 Inc., a British corporation. During the year he received dividends of $1,700 (already translated into Canadian dollars, net of $300 taxes withheld).

Rental Properties

At the beginning of 2019, Gale had two rental properties. These properties have the following operating cash flows associated with them:

#1#2
Gross rents received$20,000$12,000
Expenses related to earning rental income:
Advertising (for tenants)200Nil
Property taxes2,4002,000
Utilities (landlord provided)4,2002,800

Property # 1 was purchased in 2000 at a cost of $500,000 for both the land and building. The cost of the land was $90,000 for this total purchase price. Property #2 was purchased in 2003 at a total cost of $305,000; the fair market value of the land at the time was $105,000. The UCC balance in Class 1 for property 1 was $236,339 and property 2 was $130,307 on January 1, 2019.

During 2019, the local community enacted strict new bylaws on the safety requirements of rental properties. To upgrade the two properties to the new code would require $40,000 for property #1 and $60,000 for property #2. As a result, Gale decided to improve #1 and paid $40,000 during July 2019. However, he decided to sell property #2 and did so for $448,000, effective May 5, 2019. The fair market value of the land was appraised to be $120,000 and the building $328,000. The purchaser paid the full amount on the date of sale.

Gale used the proceeds, net of the $40,000 needed for property #1, to purchase a new sixplex on Capital Lane. The cost of the new property was $900,000, of which $150,000 related to the cost of the land. This property closed on August 1, 2019. Interest on the $700,000 mortgage is $21,800 for the last five months of the year. He was able to rent the building’s units to students beginning in September with cash flows as follows:

Gross rents received…………………………………………………………………………………………. $18,000

Expenses related to earning rental income:

Advertising (for tenants)………………………………………………………………………………………….. 500

Property taxes………………………………………………………………………………………………………… 3,400

Utilities (paid by tenants)…………………………………………………………………………………………… Nil

Other Transactions
Sale of the personal boat (cost $4,500 in ’09) ………………………………………$1,500
Sale of jewelry inherited from a great aunt (fair market value at
time of inheritance was $800) …………………………………………………2,000
Sale of antiques also inherited from this same great aunt (fair market
value at the time of inheritance was $300) …………………………………….1100
Sale of old coin collection (cost $1,500) …………………………………………800
Loss Carryforwards
Gale has the following losses being carried forward:
Net capital losses from LPP property (from 2015)$1,000
Net capital losses from other than LPP property (from 2012)6,000

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Required

  1. Calculate Gale’s net income for tax purposes for 2019. Use the Accelerated Investment Incentive (AccII) rules. Gale always likes to report the minimum possible income each year. Support your treatment of each item listed above with a reason or a complete calculation.
  2. Note whether any of the items above will give rise to a Division C deduction, or a federal tax credit in 2019, and how much.
  3. Calculate the amount of any losses being carried forward at the end of 2019, and what kind.

Question 2

(a). Prim has decided to move to Germany in 2019. She sells both her house and her cottage in Canada. Information related to these properties are as follows:

PropertyProceeds ofACBYear Purchased
Disposition
House$490,000$310,0002005
Cottage$800,000$600,0002003

Determine the minimum amount of taxable capital gain that Prim must report on her 2019 tax return as a result of the above dispositions.

(b). Cato is the sole shareholder of Cornucopia Ltd. He needs to borrow $100,000 from the company to pay off some personal gambling debts and does so on August 1, 2019. Cornucopia Ltd. has a fiscal year-end of September 30th and has never offered loans to employees in the past. The loan does not bear interest.

  1. How is it determined whether a loan is an employee loan or a shareholder loan? Which type of loan is this (likely) and why?
  2. Describe the tax consequences for Cato if he repays the loan by September 30, 2020?

What if he doesn’t? (no calculations required)

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