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chap18

# chap18 - CHAPTER 18 Partnerships and Trusts Problem 1[ITA...

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CHAPTER 18 Partnerships and Trusts Problem 1 [ITA: 53(1)( e ); 53(2)( c )] The following income statement was prepared for Ludlum, Clancy, Follet & Associates, a partnership comprised of four partners who share income equally. Ludlum, Clancy, Follet & Associates I NCOME S TATEMENT for the year ended December 31, 2005 Gross revenue ............................................................................ \$994,250 Less: Professional staff employee salaries .............. \$229,000 Office salaries ................................................ 74,000 Rent ............................................................... 42.000 Office supplies ............................................... 17,000 Client entertainment ...................................... 5,075 Capital cost allowance ................................... 16,222 Donations to charities .................................... 250,000 633,297 \$360,953 Gain on sale of securities of public companies ..... \$100,000 Dividend income: Dividends received from taxable Canadian corporations ................................................... 25,000 Capital dividends ........................................... 5,000 130,000 Net income for accounting purposes ..................... \$ 490,953 The adjusted cost base to Mr. Clancy of his partnership interest was \$45,792 at the beginning of the year. His drawings for the year were \$77,500. REQUIRED (A) Compute the partnership income for the year, the income to be allocated to Mr. Clancy and the nature of the income. (B) Compute Mr. Clancy’s taxable income and tax payable for 2005 assuming a marginal federal tax rate of 29%. Assume a provincial tax on income rate of 17%. (C) Compute the adjusted cost base to Mr. Clancy of his partnership interest. 183

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Introduction to Federal Income Taxation in Canada Solution 1 (A) Net income per financial statements ................................................................................... \$ 490,953 Add: Client entertainment ............................................................................................ 5,075 \$ 496,028 Deduct: Client entertainment 1 ...................................................................................................... \$ 2,538 Gain on securities of public companies ............................... 100,000 Capital dividends ................................................................. 5,000 107,538 \$ 388,490 Add: Donations to charities .......................................................... \$ 250,000 Taxable capital gain on securities 2 ....................................... 50,000 300,000 Income to be allocated ........................................................................ \$ 688,490 Mr. Clancy’s share ( 1 / 4 × \$688,490) ................................................... \$ 172,123 Nature of the income: Partnership Mr. Clancy ( 1 / 4 ) Taxable capital gains ................................................................... \$ 50,000 \$ 12,500 Dividends .................................................................................... 25,000 6,250 Business income .......................................................................... 613,490 153,373 Capital dividends ......................................................................... Division B income .............................................................................. \$ 688,490 \$ 172,123 Share of other items: Capital dividends ......................................................................... \$ 5,000 \$ 1,250 Donations 3 ................................................................................... 250,000 62,500 Untaxed fraction of capital gain .................................................. 50,000 12,500 (B) Income allocated ................................................................................. \$ 172,123 Add: Gross-up in respect of Clancy’s share of dividend ( 1 / 4 × ( 1 / 4 × \$6,250)) ............ 1,563 Net income and taxable income ......................................................................................... \$ 173,686 Combined federal and provincial tax @ 46% ..................................................................... \$ 79,896 Less: Donations to charities 3 ......................................................................................... (28,710) Dividend tax credit (equal to gross-up) ............................................................... (1,563) Tax payable \$ 49,623 (C) Adjusted cost base of partnership interest — January , 2005 ............................................. \$ 45,792 Add: Share of 2005 income .......................................................... \$ 172.123 Share of untaxed capital gain ( 1 / 4 × \$50,000) ...................... 12,500 Share of capital dividend ( 1 / 4 × \$5,000) .............................. 1,250 185,873 \$ 231,665 Less: Drawings ............................................................................. \$ 77,500 Share of charitable donation ................................................ 62,500 140,000 Adjusted cost base of partnership interest–December 31, 2005 ......................................... \$ 91,665 184
Solutions to Chapter 18 Assignment Problems -NOTES TO SOLUTION (1) The deduction in respect of business meals and entertainment is restricted by section 67.1 to 50% of the lesser of (i) the amount actually paid; and (ii) the amount that would be reasonable in the circumstances. (2) 1 / 2 × \$100,000 (3) Lesser of (a) 1 / 4 × \$250,000 = \$ 62,500 \$ 62,500 (b) 75% × \$173,686 = \$ 130,265 (26% × \$200) + 46% × (\$62,500 – \$200) = \$ 28,710 185

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Introduction to Federal Income Taxation in Canada Problem 2 [ITA: 53(1)( e ); 53(2)( c )] Early in 2000, Guiseppe, Cristina, Giovanni and Brunco formed a partnership to carry on a snow removal and landscape business. All the partners, except Cristina, made an initial contribution of \$40,000. Cristina made an initial contribution of \$80,000. Each agreed to share in the profits and losses of the practice based on their initial capital contribution. At the end of the 2005 fiscal year of the partnership, Cristina and Brunco decided to
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chap18 - CHAPTER 18 Partnerships and Trusts Problem 1[ITA...

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