Reference no: EM131772677
Below question is from Introduction to Federal Income Taxation of Canada:
About five years ago, Isabelle, Eden, Samara, and Joy formed a partnership to carry on a snow removal and landscape business. All the partners, except Isabelle, made an initial contribution of $40,000. Isabelle made an initial contribution of $80,000. Each agreed to share in the profits and losses of the business based on their initial capital transaction. At the end of the 2016 fiscal year of the partnership, Isabelle and Samara decided to go their separate ways. Samara received $125,000 for her partnership interest, while Isabelle received $250,000. The tax records for the five years ended December 31, 2015 reflected the following cumulative amounts:
Income (before capital gains) from operations for tax purposes....................$750,000
Losses.........................................................................................................................80,000
Capital gains (to 2015)..............................................................................................10,000
Drawings by the partners.........................................................................................730,000 (isabelle=$170,000, Eden=$150,000, Samara=$250,000 and Joy=$160,000)
Charitable Donations (added back to Division B income for tax purposes.......15,000
Financial results for the year ended December 31, 2016 are as follows:
Net income per financial statements.................................................................$60,000
Charitable Donations (deducted from accounting income)..............................2,000
Drawings:
Isabelle.....................................................................................................................10,000
Samara.....................................................................................................................5,000
Eden.........................................................................................................................5,000
Joy...........................................................................................................................4,000
Other information:
Isabelle is single, and has interest income of $2,500 for the year 2016
Samara has interest income of $6,600, and is allowed a deduction of $16,000 for child care in 2016. She has made an RRSP contribution in 2016 of $2,700 (her 2015 earned income was $15,000)
You have agreed to do the following:
Compute the partnership income for the year ended December 31, 2016, and the income to be allocated to the partnersAdvise on the tax consequences to Samara and Isabelle as a result of the disposition of their Partnership interests in 2016Compute Samara's and Isabelle's taxable income and tax payable for 2016 using the hypothetical provincial tax rate table presented below:
Taxation income: Tax:
$45,282 or less 10%
In excess of $45,282 $4,528 + 12% on the next $45,281
In excess of $90,563 $9,962 + 15% on next $49,825
In excess of $140,388 $17,436 + 17% on next $59,612
In excess of $200,000 $27,570 + 17% on remainder