Reference no: EM133612235

It is February of 2024, you, CPA, were about to meet with your new clients, Nicole and Joe.  They have come to discuss their tax situation with you. They predict that Nicole will not have to pay taxes for the 2023 year, which they believe will allow Joe to claim the non-refundable tax credit of 'spouse credit'. They have provided you with the following information, including the statements from their companies (see Exhibits I and II) which they have prepared themselves. Joe would also like to know the tax liability for his corporation, 123456 Ontario Ltd.

Facts

Nicole and Joe have been married for ten years. They are both 39 years old, and they have three children under the age of five. Their children attended daycare four mornings a week during 2023 while they worked. The total cost of the daycare for all three children was $2,400. Nicole and Joe receive the monthly Canada child benefit for each child.

Joe

• Joe is the sole shareholder and manager of 123456 Ontario Ltd., a local furniture manufacturing plant. He earns a pre-tax salary of $75,000 per year from 123456 Ontario Ltd.
• Joe received the following benefits from 123456 Ontario Ltd. in 2023:
  • Private health and dental care: $500
  • Life insurance: $600
  • $2,500 worth of products at cost
  • Registered pension plan (RPP) contributions: $3,300
    • (123456 Ontario Ltd. also deducted $3,300 from Joe's salary, which was Joe's contribution to his RPP)
• Joe contributed $1,800 to his RRSP for the 2022 taxation year (which is within his allowable limit).
• In 2022, Joe borrowed $10,000 from the bank to purchase a set of collectible coins for $12,000.  In 2023, Joe was able to sell the coins for $20,000, and he incurred interest expense of $800 and $600 for year 2022 and 2023, respectively.

Nicole

• Nicole began part-time employment at Fitness Inc. in 2023, and earned a gross salary of $25,000. She did not have any employment income the previous year.
• Nicole received free use of the owner's cottage for two weeks in May, which is typically rented out for $700 per week.
• She began a small home-based proprietorship - "Nicole's Consulting" in 2022 - which generated $300 a month in pre-tax profits in 2023. The business operates from a 200 square foot room in the family's 2,000 square foot home, and is used exclusively for the business.
• Nicole did not file a tax return in 2022 since she did not owe any taxes.
• According to Nicole, she has been contributing the maximum amount to her TFSA.  At the beginning of January 2023, she withdrew $1,000 from her TFSA account.  Overall, Nicole contributed $7,000 to her TFSA in 2023

Exhibit I

123456 ONTARIO LTD.

The 2023 and 2022 annual financial statements for 123456 Ontario Ltd. (prepared by Joe) are as follows:

	2023	2022
Revenue from manufacturing and sales	$2,000,000	$2,300,000
Dividend income from a taxable Canadian corporation	0	9,000
Investment interest income	2,000	6,000
Cost of goods sold	1,300,000	1,500,000
Gross profit	$702,000	$815,000
Salaries and wages	300,000	350,000
Other administrative costs	250,000	300,000
Net income before interest and amortization	$152,000	$165,000
Interest expense	10,000	10,000
Amortization	15,000	15,000
Net income after interest and amortization	$127,000	$140,000

Other information

1. Capital cost allowance calculations totaled $18,500 in 2022 and $19,800 in 2023.
2. In 2023, a bonus was announced for Joe's key employee, equal to a total of 1% of the 2022 annual 'revenue from manufacturing and sales.' The bonus has been structured to be distributed in two equal payments during 2024 on January 31st and November 30th, and has been included in the 2023 'salaries and wages.'
3. Cost of goods sold and 'other administrative costs' adhere to the rules of the Income Tax Act.
4. Interest expense is compliant with paragraph 20(1)(c) of the Income Tax Act.
5. All of the company's 'revenue from manufacturing and sales' is from active business.
6. The dividends were received from a public corporation, of which 123456 Ontario Ltd. owns less than 1% of the shares.
7. In 2022, the Company disposed a property and reported a taxable gain of $200,000 in 2022 tax return. The purchaser paid the remaining balance of $60,000 in 2023. 
8. 123456 Ontario Ltd did not pay any dividends in 2023.

Exhibit II

Nicole's Consulting

The 20230 and 2022 annual financial statements for the business (prepared by Nicole) are as follows:

	2023	2022
Revenue	$22,050	$13,400
Administrative expenses (Note 1)	14,000	12,550
Owner's salary	3,600	2,400
Work space in the home (Note 2)	1,450	1,450
Net income (loss)	$3,000	$(3,000)

Note 1: All of the administrative expenses are compliant with the rules of the Income Tax Act.

Note 2: Work space expenses represent ten percent of Nicole and Joe's housing costs. The total housing costs include utilities of $2,400, mortgage interest of $8,400, property taxes of $2,500, and home insurance of $1,200. (The business has met the conditions necessary to allow for the deduction of home-based business expenses)

REQUIRED

(Use tax rules applicable for 2023)

1. Prepare the calculations (in accordance with section 3 of the Income Tax Act) to determine the net income for tax purposes and taxable income for both Nicole and Joe for 2023.
2. Determine if Joe will be able to claim the non-refundable 'spouse credit' for the 2023 taxation year?
3. Calculate the federal tax liability for 123456 Ontario Ltd. for 2023?
4. Discuss any potential tax issue that Nicole and Joe should be aware