Reference no: EM133608657
Question:
You, CPA, work for Artful Accounting Inc. (AAI), a CPA professional corporation. It is February 29, 2024 and you have just finished meeting with Maxine Maximus a senior manager at your company. Ms. Maximus needs you to assist her with some of her clients, Tim Tangiers, and the late Mr. Oldson.
Tim Tangiers is a 35-year-old client of yours that has recently left Canada. Ms. Maximus wants you to discuss the Canadian income tax consequences related to Tim's 2023 tax year. She also wants you to calculate his Canadian taxable income in 2023. Tim is not interested in postponing the payment of any taxes owing and will not be providing any security to the government. You do not need to calculate his taxes payable. You can ignore the change in use tax rules. Additional information about Tim is provided in Exhibit I.
Exhibit I
Tim Tangiers
Tim is single and has no children. Tim operates an active business in Canada. He lived in Canada until March 1, 2023 when he moved all his personal effects to the United States (U.S.). While Tim was reluctant to leave Canada, his business was growing and many of his customers were in the U.S. Also, he could not find enough creditors or investors in Canada to fund his growing business, and he found several in the U.S. Tim's business is still operating in Canada
Tim visited the U.S. for approximately 30 days a year, each year for the past 3 years and as of February 1, 2023 he signed a long-term lease to rent an apartment in New York, U.S., (for him to live in) for $5,000 (U.S.) per month. Tim rented out his Canadian home starting March 2, 2023 for $3,000 per month. The value of Tim's home in 2023 is $850,000. Tim had originally purchased the home in 2012 for $400,000 before expenses. Legal fees of $1,500 and land transfer taxes of $22,000 were incurred in 2012 on the purchase of the home
Tim's business is a sole-proprietorship. It operates out of a rented store in Canada. He plans to incorporate later in the year, in the U.S., but he does not need any advice on this issue at this time. His business still operates out of the Canadian store but he may also open a U.S. store in the future (but does not want any advice about future business issues)
On March 1, 2023 Tim owned the following Canadian business assets (no capital assets were bought or sold during the year):
FMV Tax cost (as of Jan. 1, 2023)
Inventory $45,000 $15,700
Equipment (class 8) $30,000 $12,000 (ACB is $40,000)
Computers (class 50) $100,000 $33,000 (ACB is $200,000)
As of March 1, 2023 Tim owns the following (non-business) investments:
FMV Tax cost
Stocks (in an unregistered investment account) $340,000 $220,000
RRSP $270,000 $167,000
U.S. rental property $300,000 $200,000
In 2023 Tim earned the following income
Jan. 1 - Mar. 1 Mar. 2 - Dec. 31
Canadian employment income $20,000
U.S. employment income $40,000 (U.S.)
U.S. (net) rental income $9,000 (U.S.) $30,000 (U.S.)
Interest income $3,400 $5,800
Tim's Canadian business (a sole proprietorship has the following income statement) in 2023:
Gross Profit $450,000
Other expenses $300,000
Net income $150,000
Included in other expenses of $300,000 is:
Canadian charitable donations (made in January 2023) of $10,000
Annual dues related to a racquet ball membership (where Tim meets customers) of $20,000. Tim also paid another $900 for dinners with customers at this club (and this amount is also included in other expenses)
Amortization expense of $40,000
Professional fees relating to borrowing money from a Canadian bank of $5,000
Interest expense on bank debt of $2,750
Advertising expense of $30,000
Bookkeeping fees of $1,800
Reserve for uncollectible accounts receivable of $500
Rent expense of $120,000
Assume the prescribed interest rate is 5% at all times
All dollar values are in Canadian currency, unless otherwise stated
Assume the 2023 average U.S. exchange rate is 1 U.S. = $1.3333 Cdn.
Ignore the Canada-U.S. income tax treaty