Reference no: EM133042493

Question: Jake Peralta has come to you for some help in computing his income from his investments. He is trying to plan for the payment of his 2021 taxes and wants an idea as to how much that tax bill will be. Jake works for Hitchcock Consulting Inc. (HCI), a Canadian Controlled Private Corporation (CCPC). Jake, age 68, is married to Amy, who is 40. Jake has a daughter from his first marriage, Rosa, who is 22. Jake and Amy have two sons, Charles, age 13 and Raymond, age 6.

Jake has provided you with the following details regarding his activities for 2021:

He drives mostly for work. During this year, he drove a total of 35,500 kms: 28,000 km to client locations, 3,500 km between home and work and the balance for personal use. He purchased his Toyota SUV on January 10, 2021, for $58,000 plus $2,900 in GST. The SUV meets the definition of a passenger vehicle. Assume Jake claimed the maximum CCA possible in 2021. The following are the total vehicle expenses for the SUV:

Gas    $7,500       
Maintenance    1,400       
Licence    350       
Insurance    2,200    

Additional costs of travel while away from the area of his home are airfare ($8,500), accommodation ($2,100), and meals ($2,500). Under Jake' contract of employment, he is required to pay all of his own employment-related expenses. He regularly travels out of the municipality on employment-related matters.

Jake sold 2,200 shares he held in HCI, for proceeds of $122,000. He acquired 6,500 shares in 2007 as a result of exercising stock options. At the time he exercised his options, the shares were valued at $26 per share. He was granted the options in 2001 to purchase the shares for $18 per share. At the time he was granted the options, the shares were value at $15.

He has owned Cheddar Co. shares for a number of years. Cheddar Co. is a public Canadian company. The shares paid total dividends of $0.77 per share in 2021. On October, 1, 2021, after the dividend payments for the year, Jake sold 1,700 shares for $28 per share and incurred brokerage fees are $400. Based on his history of transactions, at the time of the sale, he had 1,700 shares at an adjusted cost base of $12.50 per share.

At the beginning of 2021, Jake had two rental properties. These properties are expected to have the following operating cash flows associated with them:

#1    #2*
Gross rents received ..................................................................... $ 35,000    $ 3,500
Expenses related to earning rental income:
Advertising (for tenants) ....................................................    200    -
Property taxes .................................................................... 5,400    1,200
Utilities (landlord provided) .............................................. 5,800    2,700
* Amounts are for the period of ownership and available for rent.

Property #1 was purchased in 1993 at a cost of $110,000 for both the land and building. The cost of the land was $35,000 of this total purchase price. Property #2 was purchased in 2006 at a total cost of $415,000; the fair market value of the land at the time was $125,000. The UCC balance in Class 1 for property #1 was $26,489 and Class 1 for property #2 was $231,729 at January 1, 2021.

During 2021, Jake decided to sell property #2 for $648,000, effective June 1, 2021. The fair market value of the land was appraised to be $248,000 with the remaining amount to the building. He plans to sell the rental property purchased in 1993 in 2025.

Jake used the proceeds to purchase a new sixplex resential property located downtown. The cost of the new property was $900,000, of which $375,000 related to the cost of the land. This property sale closed on August 1, 2021. He was able to rent the building's units to students beginning in September with cash flows as follows:

Gross rents received    $ 16,700
Expenses related to earning rental income:
 
Advertising (for tenants) .....................................................    1,500       
Property taxes .....................................................................    11,400       
Mortgage Interest.................................................    31,200       
Utilities (paid by tenants) ..................................................................    -    

Jake's earned income for 2020 was correctly calculated to be $121,260. Jake has always maximized his contribution to his RRSP and as such does not have any unused deduction room carried forward from the previous year. His T-4 from his employer showed a pension adjustment of $10,560 for 2020. Jake contributed the following to his RRSP relating to 2021:

From March 1 to December 31, 2021 $8,000
The first 60 days of 2022 5,500

Amy has provided you with the following details regarding her activities for 2021.

Amy owns a retail clothing shop located in Heights Mall. She runs it as a sole- proprietorship without her husband's involvment. Charles and Raymond help out every Saturday at the shop. Neither receives a salary for their work. The income statement for 2021 and other information for Amy's shop are below:

 Revenues............................................................................................    $301,000       
Cost of goods sold ...................................................    120,400       
Expenses: General and administrative......................    $96,320
Amortization on fixed assets ....................................    26,910    
123,230       
    57,370       
Gain on disposal of fixed assets (see details below)..........................       98,325       
Net income before income taxes........................................................    155,695       
Provision for income taxes (instalments paid in the year) .................    15,000       
Net income after income taxes ..........................................................    $140,695    

Additional information related to Amy's shop:

The opening UCC balances as at January 1, 2021 were as follows:
Class 1 (last building in the pool) $12,000
Class 8 ................................................................. 2,000
Class 10 11,000
During 2021, Amy purchased the following assets for her business:
Delivery van.............................................................................................. 80,000
Customer list from a competitor (unlimited life)........................... $8,000

In September 2021, Amy sold her owned business premises (consisting of land and the Class 1 building) and moved to a spot in Heights Mall, which is currently being leased. She received proceeds of $55,000 for the land (original cost of $10,000). She moved to Heights Mall in anticipation of significant increase in traffic flow (and hopefully profits).

The details of the sale of the former Class 1 building, as well as the other depreciable assets sold during 2021, are set out below:

Proceeds Original Cost Net book value
Cl 1 building 75,000 36,000 20,000
Delivery van 4,500 22,000 6,175
Amy has the following loss carry-overs from prior years:
Non-capital loss from 2017 of $37,000,
Capital loss of $110,000, from the sale of shares that occurred in 2001.

During 2021, Amy and Jake made the following selected expenditures:

Care for the children:
food and clothing for Charles and Raymond $ 6,500
babysitter for half days during 30 weeks of school term 3,000
Sci-Fi camp for both children, four weeks for each child (8 weeks) 2,800
Payments to Rosa to babysit for full days during 15 weeks of summer so Jake
And Amy could work 3,750
Payments made to Rosa to babysit so the couple could go out on date night 750
Medical expenses, paid from January 1 to December 31, 2021, for the family are listed below. The family had no medical expenses in 2020. Amounts listed are the non-reimbursed amounts.

Paid by Amy Patient Amount
Prescriptions Amy $490
Laser Eye surgery Jake 4,000
Teeth whitening Jake 2,800
Special contacts Rosa 1,500
Special equipment (see below) Rosa 7,500
Prescriptions Raymond 815

Jake' daughter Rosa has very poor eyes and is considered legally blind. It costs $800 to buy her special contact lenses to enable her to have peripheral vision. Total costs in the year for Rosa's special lenses is $2,500 ($1,000 + 1,500). As a result, Rosa's only source of income is a scholarship from the Uof C for $5,500. In spite of these hardships, she is attending the local university and with the aid of special equipment, purchased in January 2021 for $7,500, is doing quite well. Rosa's tuition for the eight months that she will be in full-time attendance was $6,900. Rosa continues to live at home while she attends university.

Amy and Jake both believe in giving back and as such, made additional contributions to registered charities of $1,700 and 1,500 respectively, in 2021.

Required:

Question 1 - Calculation of Net Income for Tax Purposes (NIFTP)

Calculate Jake and Amy's net income for tax purposes. Show supporting computations whether or not relevant to your final answer. Assume Amy has correctly filed her GST returns and that no GST is reflected in any of the amounts above.

For items excluded from your Part I calculations, explain why you excluded them.
Amy would like any suggestions on how she could minimize tax in the future.

Question 2 - Federal taxes owing

Calculate Jake and Amy's net federal tax owing. Show supporting computations whether or not relevant to your final answer. Assume Jake and Amy want to minimize tax where possible and all possible credits will be taken.

So that everyone starts from the same amount, please use the following as your NIFTP when you start your calculations for this part:
Jake - $280,000
Amy - $120,000
Please note that this NIFTP is not a check figure so do not try to get your amounts in part 1 to agree to the amounts above.

For items excluded from your Part II calculations, explain why you excluded them.

Other information:
Your response should be done in excel, even the discussion related to omitted items and planning suggestions. Your calculations should be done in excel in a way to show the calculations.

Attachment:- Tax Project.rar