Reference no: EM133111646

Question: Mrs. Wu comes to you for advice in February 2021. Last year 2020, was a year of considerable change and turmoil for her. Her job inMontreal,Quebec, with X Ltd. was finished because of a reorganization of the Company. She had been with this company since 1989. She found another job with Y ltd. in Brampton, Ontario, but it required her to move there. She commenced working at this job on January 1st.,2021. Her divorce from her former husband became final in 2019. Mrs. Wu who was already a single parent of a nine year old daughter decided to adopt a five year old child locally on May 1st.2021. By June 2021, after completing her move to her new job, the adoption was finalized. All legal costs related to the adoption totaled $15,400.

Under the terms of the employment agreement with Y Ltd. it was agreed that because she had to sell her house in Montreal to move to Toronto, the employer will re-imburse her on the loss of the sale of the property. She sold the Montreal home for $50,000 less than the cost of the house which was purchased in 1989.

Information on receipts and benefits for 2021 were as follows:
Salary earned in 2021............................................................................$188,000
Bonus............................................................................................................30,000
Profits on sale of cosmetics at home parties.......................................... 9,700
Interest on Canadian savings bonds......................................................... 3,450
Dividends from CCPC's................................................................................ 4,000
Dividends from U.S. Corporations(15% withholding tax)..................... 6,800
Spousal support receipts pursuant to divorce agreement................... 18,000
($1,000 per month for her support )
Moving allowance...................................................................................... 9,000
Donations to United Way......................................................................... 2,000

Disbursements and withholdings:
CPP and EI contributions............................................................................ (3,999)
Income taxes withheld.............................................................................. (24,000)
RPP contributions...................................................................................... (5,500 )
Union dues................................................................................................... 2,000
Registered retirement savings plan contributions, made on............... 49,000
February 14th, 2021(2020 earned income was $153,000
With a P.A. of $5,000). She had unused deduction room of $10,000.
Tuition fees for nine months full time at a local university.................. 6,000
Payment on cancellation of a lease for Waterloo apartment................1, 575
Payment on signing lease for a Montreal apartment...............................2,000
Gas and direct expenses incurred to move to Toronto.............................. 300
Trailer rental to move her belongings............................................................. 350
Cost of shipping remaining of household effects........................................5,200
Cost of staying at a hotel ($125) and meals($55) for one day
While waiting for her household furniture to be unpacked.......................... 180
Payment to babysitter for care of both children after school
And during school holiday................................................................................10,400
Summer camp for children after school (4 weeks @ $300 per week.........1,200 (each)
Hockey school for 2 children........................................................................ 900 (each)
Interest on money borrowed to buy dividend paying stocks......................... 600

Other Information:-

i. At the beginning of 2021, Mrs. Wu had 2 rental properties. These properties are expected to have the following operating cash flows associated with them:-
                                                                                             Property #1................Property #2
Gross rents received .................................................................$20,000 .....................$16,000
Expenses related to earning rental income:-
Advertising (for tenants).............................................. 200........................ 0
Property taxes................................................................ 1,400...................... 3,000
Utilities (landlord provided)......................................... 4,200....................... 2,800

Property #1 was purchased in 2000 at a cost of $90,000 for both the land and the building. The cost of the land was $25,000 of the total purchase price. The UCC balance in Class #1 for this property was $25,948 at the beginning of 2021.

Property #2 was purchased in 2010 at a total cost of $105,000; the fair market value of the land at the time was $60,000. The U.C.C. balance at January 1st.2021 for this property was $33,139.

In 2021, the local community enacted strict new bylaws on the safety requirements for rental properties.

In order to upgrade the two buildings to the new code the requirements would be $40,000 for property #1 and $60,000 for property #2. As a result Mrs. Wu decided to improve property #1 and paid $40,000 for the improvement. However, she decided to sell property #2 and did so for $248,000. The fair market value of the land was appraised to be $120,000 and the building was $128,000.

ii. Mrs. Wu's father was a manufacturer of steel rods. In 2018 he was unable ,due to illness ,to continue to operate the business and he passed title to the business to Mrs. Wu. She employed her best friend Jonathan to manage the business and all the other staff remained in place. This allowed her to continue her own employment in the field in which she was happy. The management staff was paid by salaries.

Below is the income statement for this business for the year ending December 2021-
X Ltd.
Condensed Income Statement
For the year ended December 31st.2021
Sales...........................................................................................................................3,824 ,000
Cost of sales...................................................................................................(2,878,000)
Gross Profit.............................................................................................................. 946,000
General and administrative expenses................................................................. (379,000)
Other......................................................................................................................... (186,000)
Income before income taxes................................................................................. 381,000
Income tax expense................................................................................................ (76,000)
Net income............................................................................................................... 305,000

Additional information:-
i. An analysis of the cost of sales account revealed that the inventory is valued at average cost within each of the different styles carried. Since the owner is still learning what has appeal, a "mark down rack" has become a common fixture at the back of the store. The tagged prices of the mark-downs are less that their costs, at December 31st.2021 by $1,400. This difference has not been recorded in the financial statement.

ii. Cost of goods sold includes a charge of $2,800 to set up an allowance for returns that are subsequently saleable at full retail price. No such allowance was recorded last year-end because the company only discovered that the allowance was necessary this year.

iii. General and administrative expenses include the following:-
Contributions to a registered pension plan made monthly for the two key employees, expensed
By the Corporation's accountant were as follows:-

Registered Pension Plan...........Employment Compensation
President and CEO.................................$42,000....................................$380,000
Store Manager.......................................$25,600..................................... 260,000
The pension n plan is a defined contribution (money purchase)plan. The contributions above were matched by equal contributions made by the employee.

iv. The Company paid the following amounts to Sun Insurance Limited during the year;-
Group term life insurance for the four full-time employees.........$4,400
$200,000 term life insurance policy on the president
Which was included in the "Insurance" expense account..............1,800
$6,200
X Company is the beneficiary of the insurance policy on the president. The term life insurance policy on the president was assigned to the bank as collateral for a $500,000 loan from January 1st. through to August 3th.2021. The loan was repaid on September 1st.2021 in favour of the operating line of credit.

v. The following selected information was taken from the "Promotions" account:-
Charitable donations to the United Way.............................................$6,000
Political contributions to the local politicians...................................... 5,000
Hockey tickets given to suppliers as Xmas gifts................................... 2,800
Meals & Entertainment by the owner.................................................. 3,000
Golf green fees incurred while entertaining suppliers....................... 2,800
Two summer parties and one Xmas party........................................... 18,000

vi. The Company's "Professional expense" account included the following legal and account fees Accounting fees for year-end work, and monthly book-keeping.....$20,000
Legal fees incurred to purchase equipment......................................... 4,000
Negotiations for a line of credit at the bank....................................... 8,000

vii. In 2019, the company incurred legal fees of $2,500 to set up the corporation and $1,000 to issue shares to the president and CEO.

viii. Other expenses deducted in the financial accounting computation of income include:-
Depreciation and amortization...................................................$350,000
Interest on the loan and operating line of credit...................... 9,500
Interest on insufficient income tax instalment........................... 600
Purchase of additional store fixtures bought at a going-out-of-
Business sale...................................................................... 800
Damages under a breach of contract suit initiated by a
Supplier.............................................................................. 1,900

ix. An examination of the fixed asset ledger indicated the following UCC at the beginning of 2021:-
Building -1(4%)............................................................................$568,000
Equipment(Office)-8(20%)......................................................... 39,000
Trucks-10(30%)............................................................................ 170,000
Leasehold improvements(Note 1)-Life of lease ........................165,000
Licences...................................5 years..............................................87,393
Radio communication equipment(Cl#8-20%)...............................70928

Addiitional information:-

i. The Class 13 assets consists of:-
-Improvements to a lease warehouse costing $100,000 in 2020. The remaining length of the lease in 2020was six years with two successive options of four years.
-Improvements to a leased office space for head office downtown, costing $81,600 in 2021

The remaining length of the lease was five years with an option to renew for an additional one year.

ii. The licences were purchased to start on April 22nd.2020;, at a cost of $110,500 and had a life of 5 years.

iii. The radio communication equipment was installed in 2017.

iv. The building was the only building the corporation owned.

v.. During 2021, the company had the following capital transactions:-

Additions:
Purchased in June a new concrete manufacturing building costing $1,625,000 (including $325,000 for land). The building was put in Cl#1(10%).
Additional expenditures relating to the building:-
Paved parking lot for employees (Class 17-8%)...........................................................$97,000
Erected a steel fence around an outside storage area (Class 6-10%)....................... 65,000
Renovations to the leased office space, costing........................................................... 51,000
(The lease on the office space was for 3 years with two renewal options of 3 years and two years)
Purchased equipment:-
Office equipment(Cl#8- 20%)........................................................................................$47,000
Manufacturing equipment(Cl29-50%)............................................................................255,000
Disposals:
Cost.........................................Proceeds
Equipment-Office...................................................$16,250........................................$1,950
Brick building in Class #1.......................................1,400,000......................................700,000

Required:-

i. Following the ordering rules of the ITA, compute the federal taxes owing or owe for 2021:.
II. Complete the following forms:-
T1-1
T1-2
T1-3
T1-4

APPENDIX #1
2021 Federal Income Tax Brackets
Taxable Income Tax
$49,020 or less......................................................................................15%
in excess of $49,020.............................................................................$7,353 *+ 20.5% on next $49,020
in excess of $98,040.............................................................................$17,402 ** + 26% on next $53,938
in excess of $151,978............................................................................$31,426 ***+29% on next $64,533
in excess of $216,511............................................................................$50,141+33% on the remainder
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*Computed as 15%*$49,020=$7,353
**Computed as $7,353 + 20.5% of $49,020=$17,402 (rounded)
***Computed as $17,402 + 26% of $53,938 =$31,426 (rounded)
****Computed as $31,426 +29% of $64,533=$50,141 (rounded)
2
Non-Refundable 2020 Tax credits
Dollar Base Rate Threshold

Basic Personal ...............................................................................13,808 ** 15 $151,978
(If income is above threshold the credit is reduced to $12,421)
Spouse or Equivalent................................................ . ...................13,808 ............ 15 $151,978 Spouse orEquivalent........................................................................12,141..............15 $216,151
Canada Caregiver ..............................................................................7,348 .............15 $17,256
Age credit.............................................................................................7,713 ..............15............(adjusted by the of Division B income over $38,893)
Pension income....................................................................................2,000..............15
(In this case a choice is made between the $2000 and the lesser of the pension income)
Canada employment amount......................................................... ...1,257 ..............15
Adoption expense amount.................................................................16,729...........15
Home accessibility tax credit.............................................Up to.......10,000 ...........15
First time home buyers tax credit...................................................5,000.............15
(Can split with spouse)
Volunteer firefighters tax credit...........................................................3,000..............15
Search and Rescue volunteers tax credit.............................................3,000...............15
Home Accessibility Tax credit................................................................10,000.............15
CPP(maximum)..................................................................................Amount paid...15
EI(maximum)..........................................................................................Amount paid..15
Pension................................................................................................2,000 .... 15
Mental or physical impairment amount...............................................8,662 ...............15
(Can transfer to a dependant)
Tuition amount................................................................Amount paid(can be transferred to a dependent or spouse or claimed by student in a subsequent tax year)
Medical expenses............................................................Actual Medical Expenses :-
LESS:-Lesser of:-
(i) $2,421
(ii) 3% of Division B Income

Charitable donations...........................................................200..................15 then 29% on amounts over $200
Interest paid on student loans........................................15% of actual
Dividend Tax Credit...............................6/11 of grossed up dividends for public corporations with gross up of 38% and 9/13 for CCPC with gross up of 15%
(An election can be made to transfer this credit to a spouse)
Digital News subscription credit is 15% for up to $500 subscriptions
Foreign Tax Credit.................................Lesser of:-
i. non-business income tax paid to a foreign country
ii. Net non business foreign income
divided by total Division B income times
This number times tax for the year for Part 1 taxes
Contribution Credit
$400 or less..............................................................75% of contribution
More than $400 but not more than $750................$300+50% of contribution over $400
More than $750, but not more than $1275.......... $475+one-third of contribution over $750
More than $1275...........................................................$650

Any individual can transfer to the spouse any unused credits of:-
i. Tuition
ii. Age
iii. Pension
iv. Mental or physical impairment
Tax o Old Age Security Benefits.:-
Every resident in Canada is entitled to receive Old Age Security Benefits from the Federal Govt., once that resident is 65 years old. This amount received is clawed back(repayment to the Federal Govt.) at the end of the year depending on the Division B income of that person.

The Clawback is calculated as:-
Lesser of:-
i. Old Age Security Benefits received ........................................ $xxx
ii. Division B Income less $79,845. If there is an excess 15% of this amount reduces the benefit.

Attachment:- TAX_ASSIGNMENT.rar