PERSONAL CGA-CANADA & CORPORATE TAXATION [TX1] EXAMINATION March 2011 Time: 3 Hours
Notes:
1. 2. 3. This examination is based on the Canadian Income Tax Act (ITA) with Regulations (CCH 90th Edition). Round all calculations to the nearest dollar, except price per share. The following items, applicable to the 2010 taxation year, are provided for reference: Federal Income Tax Rates -- 2010 2010 Taxable Income Up to $40,970 $40,971 $81,941 $81,942 $127,021 $127,022 and over Personal Tax Credits 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. Single status -- basic personal amount (paragraph 118(1)(c)).................................................................................. Spouse or common law partner amount (paragraph 118(1)(a)) ................................................................................. Child amount (paragraph 118(1)(b.1)) ........................................................................................................................ Eligible dependant (paragraph 118(1)(b)) Same as for spouse or common-law partner in (2) above. Infirm dependants 18 years of age or older (paragraph 118(1)(d)) ............................................................................ The credit is reduced if dependant's net income exceeds ......................................................................................... Age amount -- taxpayer is 65 years of age or over (subsection 118(2)) ................................................................... The credit is reduced if net income exceeds .............................................................................................................. Medical expenses credit (subsection 118.2(1)) The threshold is the lesser of 3% of net income and ........................................................................................ Caregiver -- parent/grandparent (maximum) (paragraph 118(1)(c.1)) ...................................................................... The credit is reduced if dependant's net income exceeds ......................................................................................... Education credit for each qualifying month -- full-time (paragraph 118.6(2)(a)) ....................................................... Education credit for each qualifying month -- part-time (paragraph 118.6(2)(b)) ...................................................... Textbook credit for each qualifying month -- full-time (paragraph 118.6(2.1)(a) ....................................................... Textbook credit for each qualifying month -- part-time (paragraph 118.6(2.1)(b) ..................................................... Canada employment amount (paragraph 118(10)) .................................................................................................... Federal Marginal Tax Rate 15% 22% 26% 29% 2010 $ 1,557 1,557 315 633 5,992 967 32,506 2,024 633 14,422 60 18 10 3 158
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Marks
30 Question 1 Select the best answer for each of the following unrelated items. Answer each of these items in your examination booklet by giving the number of your choice. For example, if the best answer for item (a) is (1), write (a)(1) in your examination booklet. If more than one answer is given for an item, that item will not be marked. Incorrect answers will be marked as zero. Marks will not be awarded for explanations. Note:
2 marks each
a.
Nani sold the following assets in 2010. All of these assets were purchased within the last five years. Cost Painting Diamond ring Old coin Automobile $ 500 2,000 2,000 5,800 Proceeds $ 1,500 3,000 800 5,000
What will be her net taxable capital gain for the year 2010? 1) 0 2) $ 250 3) $ 500 4) $ 800 b. NIS Inc. operates a manufacturing business in a country that does not have a tax convention with Canada. NIS is earning rental income on the real estate property it owns in Canada. In 2010, NIS earned $65,000 of gross rental income. After deduction of CCA ($4,000) and operating expenses ($6,000), it earned net rental income of $55,000. What are the tax consequences if NIS has not made an election under section 216? 1) 2) 3) 4) c. Part XIII tax withheld $11,000 Part XIII tax withheld $13,000 Part XIII tax withheld $13,750 Part XIII tax withheld $16,250
Noah had contributed $5,000 to his spouse's RRSP every year from 2005 to 2009. During this period his total contribution to the spousal RRSP is $25,000. On March 15, 2010, his spouse withdrew all the funds from her spousal RRSP. What will be the tax implication for Noah? 1) 2) 3) 4) There is no tax implication for Noah because he did not contribute any amount in 2010. Noah has to pay tax on $10,000. Noah has to pay tax on $15,000. Noah has to pay tax on the total amount of $25,000.
d. On July 1, 2010, John purchased a $1,000, 4%, three-year GIC from a bank. All the interest will be paid to him at the end of three years. How much interest income will John show on his 2010 tax return? 1) 2) 3) 4) $ 0 $ 20 $ 40 $ 120
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e.
The economic reality or entrepreneur test is very important for establishing if an individual is employed or self-employed. Which of the following factors is not a part of this test? 1) 2) 3) 4) Control Freedom to obtain the desired result Ownership of tools Chance of profit and risk of loss
f.
Which of the following statements is correct? 1) If an individual or his/her spouse carries on a business, they must file an income tax return by June 15 for the most recent calendar year. 2) Every taxpayer who is an individual must file an income tax return by April 15 for the most recent calendar year. 3) The tax return of a deceased taxpayer is due the later of three months from the date of death and the normal filing deadline. 4) Every trust must file an income tax return within 60 days of its taxation year.
g. Courts have indicated that taxpayer intention is the objective in a determination of whether a transaction results in the receipt of business income or a capital gain. Thus, they have developed a set of indicators, often referred to as "badges of trade." Which of the following factors is not included in the list of behavioural factors or badges of trade? 1) 2) 3) 4) Relation of the transaction to the taxpayer's business Nature of the assets involved Length of the period of ownership of the asset The motivation of profit
h. Which of the following statements regarding a tax-free savings account (TFSA) is not correct? 1) 2) 3) 4) i. Interest on money borrowed to invest in a TFSA is deductible. Contributions to the TFSA are not deductible. To open a TFSA account, an individual must be 18 years of age or older. Excess contributions in a TFSA are subject to a tax of 1% per month.
Jen recently started her tax practice as a CGA. This year she filed a tax return for a client, Lam, who was referred by her friend. Lam is a wealthy local businessman with many business interests and connections in other parts of the world. From some reliable sources, Jen learned that Lam also had other income that he did not disclose at the time of filing his return. When Jen reviewed Lam's tax situation, she discovered a considerable overseas investment for which Lam had not reported income in Canada for the last three years, including this year. When Jen discussed the situation with Lam, he said, "I don't want to pay any tax on this amount. There is no way CRA will find this amount and they should have nothing to do with my overseas income. Don't worry and file my return without this amount. Next week I'll bring you some of my other friends who may be interested in your services." What should Jen do in this situation? 1) Jen should not worry about past transactions and convince Lam to report this year's income only. 2) Jen should not worry about foreign income because Canada Revenue Agency (CRA) does not care about the income earned outside Canada. 3) This is a serious matter; therefore, Jen should immediately report these transactions to the local police. 4) If Lam is not willing to report this amount to CRA, Jen should resign from this engagement and seek advice from her local CGA association.
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j.
JoJo Ltd. paid the following expenses for its business:
JoJo promised to pay the bank, in addition to interest, a yearly service fee of $5,000 for as long as JoJo's loan from the bank remains outstanding A $1,000 cost of tickets for meals and entertainment at a fundraising event for a registered charity A $2,500 donation to a federal political party
What is the amount of total deductions available to JoJo for tax purposes? 1) 2) 3) 4) $ 500 $ 5,500 $ 6,000 $ 8,500
k. On November 30, 2010, Tanya sold a parcel of land for $100,000 (ACB $75,000). Of that price, $70,000 is not due until December 2011. She incurred $5,000 in selling costs. What will be Tanya's capital gain for 2010 from this transaction? 1) 2) 3) 4) l. $ 3,000 $ 4,000 $ 6,000 $ 25,000
Which of the following benefits given by an employer to its employees is included in taxable income? 1) 2) 3) 4) A deferred profit sharing plan Private dental plan Benefits from consulting services in respect of mental or physical health Benefits from consulting services in respect of estate planning
m. Which of the following statements is false? 1) Only private corporations are required to compute the refundable dividend tax on hand (RDTOH). 2) Corporations are connected if the dividend-paying corporation is controlled by the dividendreceiving corporation. 3) Corporations are connected if the dividend-receiving corporation owns more than 10% of the voting shares of the dividend-paying corporation and those shares represent more than 10% of the fair market value of all the issued share capital. 4) If the integration system operated perfectly, there would be a difference between a salary and a dividend paid by a private corporation when it has income subject to the small business deduction. n. Which of the following statements is correct? 1) If you provide accounting services in exchange for dental services, you would not be entering into a barter transaction. 2) Partnerships are considered separate legal entities but they are not taxable entities within the Canadian tax system. 3) Old age benefit payments should not be included in the income of the taxpayers. 4) The Income Tax Act allows a provision for reserves for a contingent liability. o. Which of the following is considered a capital property? 1) 2) 3) 4) Eligible capital properties Used motorcycle Timber resource property Insurance policy
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Question 2 Global Courier Inc., a Canadian-controlled private corporation (CCPC), operates a courier and logistics business. Financial statements for the year ended December 31, 2010 reported $702,830 net income before taxes. You have been retained to determine the corporation's income tax liability and provide advice on other tax matters. You have gathered the information outlined in Exhibit 2-1. Required 27 a. Under Part I of the Income Tax Act, calculate Global's minimum net income for tax purposes and minimum taxable income for the 2010 taxation year.
15
b. Based on your answer to part (a), calculate the minimum Part I and Part IV federal income tax, refundable dividend tax on hand (RDTOH), and dividend refund (if any) for the 2010 taxation year (ignore surtaxes and do not calculate the general rate reduction). c. Briefly explain the tax implications (if any) for item 9 in Exhibit 2-1.
3
EXHIBIT 2-1 GLOBAL COURIER INC. 2010 Financial Information 1. Global's income for accounting purposes for 2010 is summarized as follows: Income from courier operation Income from logistics operation Gain on sale of assets Interest income Dividend income $ 531,830 70,000 60,000 22,000 19,000 $ 702,830
2. Interest income included $15,000 from a government bond and $7,000 semi-annual interest from a $280,000 GIC (5% per annum rate). This GIC was acquired on April 1, 2010 and interest was received on September 30, 2010. 3. The dividend income consists of $7,000 from a public corporation and $12,000 from QQ Inc., a CCPC operating an active business. For the year ended December 31, 2010, QQ earned active business income of $250,000 and had RDTOH of $8,000. Global owns 8% of the outstanding voting shares of QQ. 4. A review of Global's 2009 corporate tax return provides the following information: Capital dividend account Cumulative eligible capital RDTOH Non-capital loss Undepreciated capital cost: Class 1 Class 8 Class 10 Class 12 Class 43 Class 50 $ 6,000 40,000 3,207 8,000 250,000 60,000 82,000 5,000 16,000 9,600
Continued...
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EXHIBIT 2-1 (Continued) 5. Global had the following transactions during 2010: On August 31, 2010, a new warehouse for storage was constructed and occupied, as shown on its balance sheet: Land Purchase price Paved parking Landscaping Building Cost of construction Architect fee $ 75,000 14,000 4,500
$ 250,000 6,000
On July 1, 2010, Global sold an independent store for $120,000 (land $60,000; building $60,000). This property's original cost was $80,000 (land $30,000; building $50,000). On June 1, 2010, Global purchased a small airplane for $600,000. On the same date, it purchased a new delivery truck for $80,000 and traded its old delivery truck for $35,000, which originally cost $80,000. On August 1, 2010, Global purchased three new computers costing $19,500. 6. On December 31, 2010, Global sold its processing equipment for $12,000, which was purchased on January 1, 2007 at a cost of $52,000. There is no equipment left in this class. 7. Global's income statement for the year ended December 31, 2010 includes the following: Amortization Legal expenses Other expenses Reserve for bad debt expense $ 43,000 15,000 29,800 31,000
Legal expenses included $3,000 for the collection of bad debts, and $12,000 for the interim audit fee for the current year. Other expenses included newspaper advertising for $8,200, a $500 monthly contribution (January to December) to a charitable organization, $2,800 for the annual membership dues of a golf club used for business purposes, $12,000 for acquiring a permanent mailing list for the business, and $800 for entertainment tickets. 8. On December 31, 2010, Global declared and paid dividends of $59,850, of which $6,000 was from the capital dividend account. 9. The president of the company recently attended a seminar about scientific research and experimental development (SR&ED) offered by Canada Revenue Agency (CRA). The president is wondering about the special provision regarding ongoing expenditures and the cost of tangible assets.
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Question 3 Jammal is employed in the manufacturing industry by Alpha Inc., a Canadian public corporation. He has requested your assistance in preparing his 2010 income tax return. Information regarding Jammal's financial activities for 2010 is outlined in Exhibit 3-1. Selected information from his 2009 return is provided in Exhibit 3-2. Required 16 9 a. Calculate Jammal's minimum net income for tax purposes in accordance with the format of Section 3 of the Income Tax Act, and his minimum taxable income for the 2010 taxation year.
b. Based on your answer to part (a), calculate Jammal's minimum federal income tax for the 2010 taxation year. Show all calculations. EXHIBIT 3-1 JAMMAL 2010 Financial Information 1. Jammal received a gross salary of $65,000. From this amount, Alpha deducted income tax of $15,000, CPP and and EI of $2,910. Alpha also contributed $2,500 to the registered pension plan on Jammal's behalf, and he made a matching contribution of $2,500. The company also contributed $800 to a private health insurance plan for Jammal. 2. Jammal is a member of a group disability insurance plan offered by Alpha. This plan pays $3,500 per month while disabled. The premium is $50 per month, of which 50% is paid by the employee. Employees are not required to make any payments while on disability. Jammal has been a member of this plan from June 1, 2005. Due to an accident, Jammal was off work from November 1 to December 31, 2010 and was receiving the disability benefit during this time. 3. Jammal is required to use his own automobile for work. He received a travel allowance of $1,500 from Alpha. He is not required to travel out of town. He incurred the following expenses in 2010: Gasoline Insurance Meals while travelling for employer Parking during employment duties Automobile lease cost $ 1,500 1,200 400 100 4,200
In 2010, Jammal drove a total of 15,000 kilometres (km), of which 10,000 km were for personal purposes. 4. Jamal had one house in the city and one cottage for summer time. On November 1, he sold both properties. Residence House Cottage Date of purchase 2003 2008 Selling price $ 150,000 80,000 Cost $ 110,000 50,000
5. In the first week of January 2008, Jamal was granted an option to purchase 1,000 shares of Alpha for $15 each. The fair market value of the common shares at the time of granting the right was $17. On March 15, 2010, when the market value of the shares was $20, Jammal exercised his option and purchased 1,000 shares. These are the only shares of Alpha that Jammal owns. On December 30, 2010, he sold all these shares for $23,000. 6. In 2005, Jammal purchased the shares of Indus Ltd., a CCPC, for $10,000. He sold these shares on August 31, 2010 for $5,000. All of Indus's assets are used in an active business. Continued...
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EXHIBIT 3-1 (Continued) ( . ceived a divide from a for end reign corporat tion of $1,700 (net of $300 withholding ta 0 ax). 7. Jammal rec . 10, aid prescribed by his doctor. 8. In June 201 Jammal pa $2,000 for vitamins and supplements p . ntributed $2,0 to a tax-fre savings acc 000 ee count (TFSA) and $8,000 to an RRSP acc o count. 9. Jammal con 0. ade nation to a reg gistered Canad dian Amateur Athletic Asso ociation. Jamm also mal 10 Jammal ma a $300 don received $3 300,000 as the only benefici e iary of his fath her's life insur rance policy. d ld, 19 Kamal attende university o a ed on 11. Jammal is a widower and his only chil Kamal, is 1 years old. K full-time ba for 8 mon in 2010. He had scholar asis nths H rship income o $4,000 in 2 of 2010, and he paid a total tuition fee of $2,000. Jam mmal uses all available dedu uctions/credits with respect to the child. s EXHIBIT 3-2 Select 2009 Can ted ntax Schedule es
1 00
END OF EXAMINATION
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PERSONAL & CORPORATE TAXATION [TX1] EXAMINATION
TX1
Before starting to write the examination, make sure that it is complete and that there are no printing defects. This examination consists of 8 pages. There are 3 questions for a total of 100 marks.
READ THE QUESTIONS CAREFULLY AND ANSWER WHAT IS ASKED.
To assist you in answering the examination questions, CGA-Canada includes the following glossary of terms. Glossary of Assessment Terms Adapted from David Palmer, Study Guide: Developing Effective Study Methods (Vancouver: CGA-Canada, 1996). Copyright David Palmer.
Calculate Mathematically determine the amount or number, showing formulas used and steps taken. (Also Compute). Examine qualities or characteristics that resemble each other. Emphasize similarities, although differences may be mentioned. Compare by observing differences. Stress the dissimilarities of qualities or characteristics. (Also Distinguish between) Express your own judgment concerning the topic or viewpoint in question. Discuss both pros and cons. Clearly state the meaning of the word or term. Relate the meaning specifically to the way it is used in the subject area under discussion. Perhaps also show how the item defined differs from items in other classes. Provide detail on the relevant characteristics, qualities, or events. Create an outcome (e.g., a plan or program) that incorporates the relevant issues and information. Calculate or formulate a response that considers the relevant qualitative and quantitative factors. Give a drawing, chart, plan or graphic answer. Usually you should label a diagram. In some cases, add a brief explanation or description. (Also Draw) This calls for the most complete and detailed answer. Examine and analyze carefully and present both pros and cons. To discuss briefly requires you to state in a few sentences the critical factors. This requires making an informed judgment. Your judgment must be shown to be based on knowledge and information about the subject. (Just stating your own ideas is not sufficient.) Cite authorities. Cite advantages and limitations. In explanatory answers you must clarify the cause(s), or reasons(s). State the "how" and "why" of the subject. Give reasons for differences of opinions or of results. To explain briefly requires you to state the reasons simply, in a few words. Identify Distinguish and specify the important issues, factors, or items, usually based on an evaluation or analysis of a scenario. Illustrate Make clear by giving an example, e.g., a figure, diagram or concrete example. Interpret Translate, give examples of, solve, or comment on a subject, usually making a judgment on it. Justify Prove or give reasons for decisions or conclusions. List Present an itemized series or tabulation. Be concise. Point form is often acceptable. Outline This is an organized description. Give a general overview, stating main and supporting ideas. Use headings and sub-headings, usually in point form. Omit minor details. Prove Establish that something is true by citing evidence or giving clear logical reasons. Recommend Propose an appropriate solution or course of action based on an evaluation or analysis of a scenario. Relate Show how things are connected with each other or how one causes another, correlates with another, or is like another. Review Examine a subject critically, analyzing and commenting on the important statements to be made about it. State Clearly provide a position based on an evaluation, e.g., Agree/Disagree, Correct/Incorrect, Yes/No. (Also Indicate) Summarize Give the main points or facts in condensed form, like the summary of a chapter, omitting details and illustrations. Trace In narrative form, describe progress, development, or historical events from some point of origin. Explain
Compare
Contrast
Criticize
Define
Describe Design
Determine
Diagram
Discuss
Evaluate
CGA-CANADA PERSONAL & CORPORATE TAXATION [TX1] EXAMINATION March 2011 SUGGESTED SOLUTIONS Marks
30 Question 1 Note:
2 marks each
Time: 3 Hours
Sources/Calculations: a. 2) Topic 6.4 (Level 1) 1,500 1,000 (deemed) + 3,000 2,000 + 1,000 (deemed) 2,000 = 500 1/2 = 250 b. 4) Topic 10.3 (Level 2) 65,000 25% = 16,250 c. 2) Topic 5.8 (Level 1)
d. 1) Topic 5.2 (Level 1) e. f. 2) Topic 2.1 (Level 1) 1) Topic 1.4 (Level 2)
g. 4) Topic 3.1 (Level 1) h. 1) Topic 5.6 (Level 1) i. j. 4) Topic 10.6 (Level 1) 3) Topic 3.5 (Level 1)
k. 3) Topic 6.3 (Level 1)
1
100,000 (75,000 + 5,000) = 20,000 14,000 1 = 6,000 Lesser of a) 70,000 / 100,000 20,000 = 14,000; b) 1/5 20,000 (4 0) = 16,000
l.
4) Topic 2.3 (Level 1)
m. 4) Topic 9.3 (Level 2) n. 2) Topic 3.3 (Level 1) o. 2) Topic 6.2 (Level 1)
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Question 2 a. Minimum net income for tax purposes and taxable income Net income per financial statements Add (Deduct): Gain on sale of assets Accrued interest on GIC -- 5% (280,000) (3/12 or 92/365) Taxable capital gains -- land -- 1/2 (60,000 30,000) Building -- 1/2 (60,000 -- 50,000) Terminal loss -- Class 43 -- (12,000 16,000) CEC deduction -- 7% (40,000) + 7% (3/4) (12,000) CCA -- Class 1 -- 4% (250,000) + 4% (1/2) (250,000 + 6,000 50,000) CCA -- Class 8 -- 20% (60,000) CCA -- Class 9 -- 25% (1/2) (600,000) CCA -- Class 10 -- 30% (82,000) + 30% (1/2) (80,000 35,000) CCA -- Class 12 -- 100% (5,000) CCA -- Class 17 -- 8% (1/2) (14,000) CCA -- Class 50 -- 55% (9,600) CCA -- Class 52 -- 100% (19,500) Landscaping Club dues Customer mailing list Amortization Charitable donations (500 12) Entertainment -- 50% (800) Net income for tax purposes Deduct: Taxable dividends -- (7,000 + 12,000) Charitable donations (500 12) Non capital loss Taxable income Note:
For Class 1, a rate of 6% for the new building is also correct. The 2 marks for net income for tax purposes are reduced if items that should be excluded from the calculation are incorrectly included, such as legal fees for the collection of bad debts, audit fee, newspaper advertising, and reserve for bad debt expense.
$ 702,830 (60,000) 3,500 15,000 5,000 (4,000) (3,430) (14,120) (12,000) (75,000) (31,350) (5,000) (560) (5,280) (19,500) (4,500) 2,800 12,000 43,000 6,000 400 555,790 (19,000) (6,000) (8,000) $ 522,790
(1) (1) (1) (1) (1) (1) (2) (1) (1) (2) (1) (1) (1) (1) (1) (1) (1) (1) (1) (1) (2) (1) (1) (1)
Continued...
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b. Federal tax Part I tax Basic rate -- 38% $522,790 Abatement -- 10% $522,790 $ 198,660 (52,279) 146,381 $491,290 522,790 500,000
(1) Small business deduction (SBD) -- 17% least of: Active business income 1 Taxable income Business limit Additional refundable tax on investment income -- 62/3% lesser of: Aggregate investment income -- Net taxable capital gains (15,000 + 5,000 = 20,000) + Interest (22,000 + 3,500 = 25,500) Taxable income less amount on which SBD is computed (522,790 491,290) 62/3% $31,500
1
(2)
(83,519)
$ 45,500 31,500 2,100 $ 64,962 $555,790 (20,000) (25,500) (19,000) $491,290 $ $ 2,333 4,000 6,333 3,207 6,333
(3)
Active business income: Net income for tax purposes Deduct: Net taxable capital gains -- (15,000 + 5,000) Interest (22,000 + 3,500) Dividends
(3) Part IV tax (1) (1) Dividend from Canadian public corporation -- 331/3% (7,000) QQ Inc. -- not connected -- 331/3% (12,000) RDTOH (1) Opening Part IV tax Refundable portion of Part I tax -- least of: 262/3% Investment income (45,500 above) 262/3% Taxable income less amount on which SBD is computed (522,790 491,290) Part I tax Dividend refund: Lesser of: 331/3% (59,850 6,000) RDTOH c.
$
$ 12,133 8,400 64,962
(2) (1)
8,400 $ 17,940
$ 17,950 17,940
$ 17,940
3
Ongoing expenditures can be deducted in full in the year incurred. The cost of tangible assets that are used all or substantially all of the time in the SR&ED process can be fully deductible in the year of acquisition. These expenditures can be carried forward indefinitely as a deduction for any future year.
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Question 3 a. Net income for tax purposes and taxable income Section 3 (a) Employment income: Salary Travel allowance Disability benefit -- [$7,000 ($25 65)] Stock option benefit -- ($20,000 $15,000) Deduct: RPP Travel -- {[5,000 / 15,000 (1,500 + 1,200 + 4,200)] + 100} Property income: Foreign dividend ($1,700 + 300) Section 3 (b) Taxable capital gains: House Gain $ 40,000 Exemption [(1 + 6)/8] 40,000 = 35,000 Capital gain $ 5,000 Share of Alpha ($23,000 20,000) Taxable capital gain (50% of CG) Section 3 (c) Cottage [(1 + 2)/3] 30,000 = $ 30,000 30,000 $ Nil $ 5,000 3,000 4,000 77,975 $ 65,000 1,500 5,375 5,000 76,875 (2,500) (2,400) 71,975 2,000 73,975
(1) (2) (1)
(1) (2)
(1)
(2) (1)
(1)
Other deductions RRSP contribution (from Cantax) Section 3 (d)
(7,000) 70,975
(1) (2) (1)
Losses Indus Ltd. shares -- ABIL -- 1/2 (10,000 5,000) Net income for tax purposes Deduct: Net capital loss (limited to TCG) Taxable income Note:
(2,500) 68,475 (4,000) $ 64,475
The 2 marks for net income for tax purposes are reduced if items that should be excluded from the calculation are incorrectly included, such as employer contributions to RPP, private health insurance benefits, meals while traveling, taking deduction of stock, deduction of TFSA contribution, taking proceeds of life insurance policy, taking credit for vitamins and supplements or if items are misclassified under section 3 of the Income Tax Act.
Continued...
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b. Federal tax $ 40,970 15% 23,505 22% $ 64,475 Tax credits $ 6,146 5,171 11,317
(1)
(1) (1) (1) (1) (1) (3)
Individual -- 10,382 15% CPP/EI -- 2,910 15% Employment -- 1,051 15% Charitable donation -- (200 15% + 100 29%) Foreign tax credit Tuition, education, and textbook credits transferred Lesser of: i) 15% of $5,000 ii) Tuition, education, and textbook credits [15% of ($2,000 + 400 8 + 65 8)] Lesser amount
(1,557) (437) (158) (59) (300)
750 858 (750) $ 8,056
100
END OF SOLUTIONS
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CGA-CANADA PERSONAL & CORPORATE TAXATION [TX1] EXAMINATION March 2011 EXAMINER'S COMMENTS
General Comments
The overall results on this examination were satisfactory. Most students were able to complete the examination within the designated time period. The multiple-choice questions, which were designed to examine breadth of knowledge, achieved lower results than the long-answer questions. The majority of the students were very comfortable with the personal tax credit calculations, but the students had difficulty with certain items for the calculation of net income. For the TX1 examination, it is very important that students show all their calculations to be awarded part marks. It is also important to follow the instructions on the cover page. When the answers are scattered throughout the examination booklet it is difficult to follow the answers and the logic. It is recommended that student read the textbook thoroughly and do the exercise questions.
Specific Comments
Question 1 Multiple choice (Levels 1 and 2) Performance on this question was unsatisfactory. Students had the most difficulty with parts (b) part XIII tax, (c) RRSP, (d) interest income, (g) business income, (j) deductible expenses, and (o) capital property. Question 2 Corporate tax, including the calculation of business income, capital cost allowance, property income, capital gains, Part I and Part IV tax, and RDTOH (Levels 1 and 2) Performance on this question was satisfactory. The most common errors in part (a) were incorrect calculations for the CEC, CCA in Class 1 and Class 10, donations, and capital gains. Part (b) was well answered. The most common errors were incorrectly calculating the Part IV tax and the dividend refund. Part (c) was poorly answered. Most students did not seem to be familiar with the tax implications of the scientific research and experimental development (SR&ED) program. Students are expected to be able to find the items in the Income Tax Act. Question 3 Personal income tax, including employment income, property income, capital gains/losses, and the calculation of personal tax and tax credits (Levels 1 and 2) Performance on this question was unsatisfactory. The most common errors in part (a) were the calculation of disability benefits, the travel expenses deduction, the capital gain on the cottage, foreign dividends, and not mentioning that net capital losses are limited to the taxable capital gains. Part (b) was well answered except for the tuition, education, and textbook credits and foreign tax credit.
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