Practice Problems and Solutions Ch 6

Practice Problems and Solutions Ch 6 - AIT805 Selected...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
AIT805 Selected Chapter 6 Problems and Solutions: Property Income Solution 10 (Basic) (a) Net income from employment, team salary $150,000 Net income from proprietorship business 35,000 Net income from endorsements (business income) 30,000 Net income from property: Dividends from Canadian corporation $ 7,200 Add 45% gross-up 3,240 Taxable amount $ 10,440 Dividends from foreign corporation 7,500 Interest from Canadian bank 3,000 One-year anniversary interest accrual on GIC (attributed to Trent) 600 $21,540 Expenses: SDBox $ 50 Interest on loan 4,000 ( 4,050 ) Net income from property 17,490 Net income $232,490 (b) Basic Tax Planning Consider using a deferred-income fund, such as an RRSP, for the GICs. Investigate whether the investment in the foreign corporation might not be better invested in a Canadian corporation because of the dividend tax credit. Pay higher, yet reasonable, compensation to Mary. Mary has a salary in her own right; consider investing it rather than spending it on family personal needs. This will result in the investment income being taxed in her hands. Consider incorporating the sporting goods store. Consider setting up a tax-free savings account in 2009. Solution 14 (Basic) Interest expenses are deductible if there is a reasonable expectation of earning income from property. Investment Not deductible Deductible Common shares $20,000 1 Gold bullion $25,000 2 Corporate bond 20,000 3 Preferred shares (RRSP) 10,000 4 Common shares 30,000 5 Paintings 15,000 6 GICs 20,000 5 Total $ 50,000 $ 90,000 Deductible interest = $90,000 × 8.5% = $7,650 NOTES TO SOLUTION (1) As there is often an expectation of dividend income on common shares, the interest is deductible. (2) As capital treatment has been chosen for gains/losses on the gold bullion, the interest is not deductible. (3) The corporate bond is income-producing and the associated interest would be deductible. (4) The preferred shares were purchased in an RRSP; deduction of interest is disallowed. (5) The associated interest on the common shares and GICs would be deductible, as there is the expectation of earning property income. (6) The paintings from well-known galleries would be considered an investment for earning future capital gains and, therefore, the associated interest would not be deductible. 183
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Solutions to Chapter 6 Assignment Problems Solution 13 (Basic) (a) Under paragraph 20(1)( c ) of the Act, interest expense can be deducted on debt incurred to earn income. In this instance, Ashley has sold her investments to pay down her mortgage. She then remortgaged the house and reacquired her investments. While the CRA might challenge this under GAAR, it appears Ashley has met the conditions required for the interest deduction. Placing 50% of the investments in her spouse’s name is an ineffective way of splitting income with her
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 06/03/2009 for the course BUSINESS AIT 805 taught by Professor Shirenekhan during the Winter '09 term at Seneca.

Page1 / 3

Practice Problems and Solutions Ch 6 - AIT805 Selected...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online