Reference no: EM132656386

QUESTION 1
You have just finished meeting with Paul and Christine, a married couple, who have come to you for some tax advice. They brought along information about Paul's employment income for 2019.

For several years, Paul has been a commission salesperson working for a company that sells technology solutions to businesses. For 2019, he earned a base salary of $180,000 plus commissions based on his sales. He travels across the country for work and is very successful. He is responsible for paying certain expenses when he is travelling, while his employer is responsible for other expenses. Paul is responsible for paying any entertainment and promotional costs he incurs, as well as air transportation, hotel, and meal costs while he is travelling for business.

Beginning March 1, 2019, Paul's employer provided him with a leased vehicle for the rest of the year. He had no car before this date. As his employer does not have an office in Vancouver, Paul operates out of his home office, where he principally conducts business. He has a desk and computer equipment that he owns. This office represents 10% of the floor space in Paul's home. While he does not see clients at his home, he does use this space exclusively for business.
Paul provides you with the following information for 2019:

Paul:

Salary paid during the year                                                              $180,000

Commission income paid during the year                                         20,000

Expenses paid personally:

Utilities for house                                                                                     2,000

Minor repairs to home                                                                             1,700

Property taxes                                                                                           3,500

Travel costs (airline tickets and hotel costs)                                   15,000

Meals while travelling                                                                              5,000

Entertainment of clients                                                                          6,000

Promotional material (brochures)                                                          200

House insurance                                                                                            600

Mortgage interest                                                                                   10,000

New computer and printer purchased this year                                   2,500

Golf membership for golfing with clients                                               4,000

Benefits paid for by employer:

Vacation for Paul and Christine as a reward for having the largest increase in sales this year  $6,000

Health and dental benefits2,000

Long-term disability insurance with wage-loss protection     500

Group term life insurance     960

Financial planning - annually, employer pays for one meeting with a financial planner for each employee     1,000

Gift to Paul provided on his birthday - front-row tickets to a hockey game     900

Monthly lease payment on the company car     750

Car operating costs (maintenance, fuel, insurance)  6,000

Total kilometres driven     40,000 KM

Personal kilometres driven     15,000KM

Gift from customer:

Golf clubs as a gift from a very happy customer$1,200

Paul's payment to his employer for personal use of the vehicle within 45 days of the year end$1,500
Paul has notified his employer that, if he is eligible, he will elect to use the "lesser of" calculation for the operating cost benefit on the vehicle.

Required:
a) Determine the expenses that Paul can deduct from his employment income. Calculate the expense deductions for sales and non-sales employees and explain items that are excluded from your calculations. Briefly explain whether Paul should claim expenses as a sales or non-sales employee.
b) Determine Paul's net income for tax purposes for 2019.
c) List all items excluded from your net income calculation and explain why the item has been excluded.
Note: Round all amounts to the nearest dollar and ignore GST and provincial taxes. Show the full detail of all steps in your calculations, even if the result is zero.

QUESTION 2
Fernando, CPA, started his own public accounting practice in 2019 when the company he had worked for since 2010 went bankrupt and he lost his job. During all the years Fernando worked for the company, he was only involved in the preparation of simple personal tax returns. Since he started his practice, Fernando has not yet had the time to take tax courses or seminars, and he has not purchased any tax-related manuals or subscribed to any tax reporting service.

One of his new clients, Sharon, has consulted him on a complex corporate tax matter involving a foreign affiliate. Sharon requires an answer in two days' time.

Required:
Comment on the major ethical issues Fernando should consider.

QUESTION 3
You have just finished meeting with Christine Connors, a sole proprietor, who is looking for some help with her tax situation for 2019.

1. Following is the income statement for Christine's business to December 31, 2019 (ignore GST):

Less:

Wages                                                                                          $123,000

Rent                                                                                                 104,000

Meals and entertainment                                                             15,250

Insurance                                                                                           2,000

Interest on car loan and line of credit                                           5,960

Convention expenses                                                                      12,225

Charitable donation                                                                              650

Interest and penalties on late filing of 2018 tax return1,250264,285

Net income$235,715

2. Christine provided the following information with respect to amounts on the income statement:
• The income statement has been prepared on an accrual basis, but the proceeds from sale of capital assets are not included in the income calculation.
• There is one account receivable for $5,000 that is currently outstanding, and Christine feels that it may be uncollectable. She has never had a problem with collecting accounts in the past and is unsure how to deal with this. The amount has been included in the accounts receivable balance for 2019.
• Meals and entertainment include the following items:
o annual holiday party for all employees - $8,250
o lunches and dinners purchased for staff working long hours - $3,000
o Christine's tennis club membership, which she uses to network with fellow business people - $4,000
• Christine borrowed the money necessary to purchase a new car on January 1, 2019. Interest paid on the loan totalled $5,010. Christine also has a line of credit for her business to help her manage her cash flow requirements. The interest paid on this line of credit for 2019 was $950.
• Christine declared a bonus at December 31, 2018, in the amount of $25,000 payable to her assistant. This amount was paid in December 2019, and the entry was debited to the bonus payable account. Assume the 2018 return was filed correctly.
• The amount shown for convention expenses includes a three-day conference of an organization of Canadian sales professionals held in Hawaii. The cost of attending this conference was $10,500 in conference fees and $1,725 for meals.
• The business makes a donation every year to a registered charity that provides clothing to women returning to work. The amount of the donation was $650 in 2019.
• Christine points out that the interest and penalties on her late-paid taxes are included on the income statement.
3. Christine's business has the following UCC balances as of December 31, 2018:
Class 8: Office furniture - $32,000
Class 10: Delivery vehicle - $21,250
Class 10.1: Christine's car - $17,850
Class 13: Leasehold improvements - $90,000
4. The business purchased a new passenger vehicle on January 1, 2019. The cost of this vehicle was $62,000. The old vehicle, purchased in 2016 at a cost of $45,000, was sold for proceeds of $31,000.
5. Expansion during the year required the purchase of an additional $25,000 in leasehold improvements. The original leasehold improvements were purchased in 2016 at a cost of $120,000. The lease was signed in 2016 for a seven-year term with one three-year renewal term.
6. The only other vehicle was a delivery vehicle with a cost of $25,000 that was purchased in 2018. It was not used as frequently as Christine had planned and was not generating any additional revenue. As a result, she sold it on July 31, 2019, for $15,000.
7. During the year Christine purchased a franchise on March 15, 2019, at a cost of $60,000. The franchise agreement will be in place for 10 years from the date of purchase.
8. Christine purchased new office equipment at a cost of $2,000. She sold some older equipment that had a cost of $10,000 for proceeds of $5,000.
Required:
a) Determine the maximum CCA that Christine can deduct in computing her business income, including any terminal loss or recapture. Calculate the ending UCC balances in all CCA pools. Ignore leap years.
b) Determine Christine's net business income for tax purposes by preparing a reconciliation of accounting income to net income for tax purposes, starting with net income for accounting purposes and adding and subtracting items as needed. Briefly explain any items that were excluded from the calculation. Show all your calculations.

QUESTION 4
It is late March 2020. You have just met with your client Ahmed about his taxes. Ahmed has several tax issues for the 2019 taxation year that he needs your help with.
1. Ahmed has two T4 slips from 2019, as he moved during the year:
Ontario employerNova Scotia employer
Employment income$62,200$65,000
CPP deducted2,7492,749
EI deducted860860
RPP contributions2,5001,500
Pension adjustment4,0003,000
Income tax deducted12,00012,500
2. Ahmed and his daughter Zeinab moved from Ontario to Nova Scotia during 2019 for work, which he began right away. Their moving expenses include the following items:
Movers - packing and transporting furniture and belongings$6,000
Selling costs of Ontario home4,000
Legal costs to acquire new home in Nova Scotia1,250
Costs related to vacant former home while up for sale5,500
Costs to repaint new home4,000
Gas to drive family car to Nova Scotia200
Two nights in hotel for the family400
Meals during the trip to Nova Scotia200
For tax purposes, Ahmed would like to use the detailed method for calculating gas and meals expenses related to moving.
3. Ahmed owned a rental property in Toronto for several years. The property cost $500,000, with $150,000 allocated to the land and $350,000 for the building. It was put up for sale at the end of 2018 and was sold in July 2019 for $650,000, with $175,000 allocated to the land. The UCC balance on December 31, 2018, was $322,000. In anticipation of the sale, the tenant had moved out on December 31, 2018, and the property had been vacant until it was sold.
Ahmed used the proceeds of the sale to purchase another residential rental property in Halifax on August 1, 2019. He does not want to defer any gains or recapture. Ahmed gave you the following income and expenses for this property for the year, along with its cost:

Rental income$ 30,000
Total expenses36,000
Total cost of property480,000
Portion of cost allocated to land80,000
Ahmed also advises you that he sold a piece of vacant land at a significant loss this year. He had planned to build a rental property on the land but learned after purchasing it that it was highly polluted. The cost of this land was $200,000, and it was sold for $30,000 in 2019.
4. Ahmed has a T5 slip from 2019 indicating that he earned an eligible dividend of $20,000 and interest income of $300.
5. For the 2019 taxation year, Ahmed made RRSP contributions of $3,000. This is his first RRSP contribution, and his RRSP deduction limit for 2019 is $120,000.
6. Ahmed pays spousal support payments to his ex-wife of $500 per month pursuant to a legal agreement. He is behind in his payments and was only able to pay $3,500 in 2019.
Required:
a) Calculate the following for the 2019 taxation year. Provide explanations for omitted amounts.
i) Ahmed's rental income and any taxable capital gains and allowable capital losses from the sale of the real estate properties that he sold during 2019
ii) Ahmed's deductible moving expenses
b) Calculate net income for tax purposes for Ahmed for 2019.
c) Determine Ahmed's estimated RRSP deduction limit for 2020.
Note: Round all amounts to the nearest dollar and ignore GST and provincial taxes. Show the full detail of all steps in your calculations, even if the result is zero.