0668_001 - Assignment 1 Module 2 Taxation 1 Problem 15 (A)...

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Unformatted text preview: Assignment 1 Module 2 Taxation 1 Problem 15 (A) Employment income 89% Gross salary ............................................................................. .. $115,000 Sec. 5 Rent ($1,200 x .75 x 12) .......................................................... .. 10,800 6(1)(a) Bonus ....................................................................................... .. 12,500 Sec. 5 Monthly allowance for incidentals ($150 x 12) ......................... .. 1,800 Par. 6(1)(b) Imputed interest [$8,000 x .06 x 90/3651“) ............................. .. 118 Ssecs. 6(9), 80.4(1) Group income protection benefits [$11,500 — $2,880]] ............ .. 8,620 Par. 6(1)(f) $148,838 Less: RPP — Current service‘z) ................................... .. $ 5,000 Par. 8(1)(m) Union dues ......................................................... .. 800 Spar. 8(1)(I)(iv) Travel expenses ................................................. .. 1,200 Par. 8(1)(h) Car expenses“) ................................................... .. 9,837 $16,837 Pars. 8(1)(h.1), (1) $132,001 (B) Excluded items (i) The 25% of the monthly rent on Anita’s home in Toronto that she reimburses to the company does not form part of the taxable benefit calculation as it is not paid by her employer. (ii) Income tax withheld is not an allowable deduction under section 8 by virtue of subsection 8(2). (iii) CPP and El premiums paid are not an allowable deduction under section 8 by virtue of subsection 8(2), but these amounts will be allowed as tax credits under Division E. (iv) Contributions to the company group RRSP are not deductible under section 8 by virtue of subsection 8(2) but are deductible under section 60 of the Act subject to the applicable limits. (v) Group accident income protection insurance premiums are not deductible under section 8 by virtue of subsection 8(2). (vi) The monthly rent reimbursed by Anita to the company is not deductible under section 8 by virtue of subsection 8(2). (vii)The company payment of the board and lodging costs when Anita is out of town is not a taxable benefit as it meets the condition for exemption set out in subsection 6(6) because: - her duties at these locations are temporary; - she maintains a principal place of residence at another location (Toronto) that is available to her throughout her period of stay at these out of town locations and her principal place of residence is not rented to any other person during these periods; - due to the distances involved, she could not reasonably be expected to return to her principal place of residence in Toronto from these out of town locations on a daily basis; and - she is never at an out of town location for less than 36 hours. (viii) The provision of boots and company uniform is not a taxable benefit by virtue of IT-47OR, paragraph 29. (ix) The company contribution to a registered pension plan is not a taxable benefit by virtue of paragraph 6(1)(a)(i). (x) The fitness club membership dues paid by the company would not be taxable by virtue of paragraph 6(1)(a) if the membership is principally for the employer’s advantage than for Anita’s personal enjoyment [IT—470R, par. 34]. If the membership was determined to be principally for Anita’s personal enjoyment, the taxable benefit is $805. (C) HST rebate (was not reguiredj 13/113 of section 8 deductions excluding zero-rated and exempt items: Car expenses deducted under pars. 8(1)(h) and (I) (see Note (3)) ...................... .. $ 9,816 Less: 1 Acquired car costs with no HST, and CCA: Insurance (exempt) ........................... .. $ 1,333 Licence (exempt) .............................. .. 90 Interest 118 CCA (see below) 1,207 X 35,000km _ $ 2,748 40,000km~ (2,405) Leased car costs with no HST: Insurance (exempt) ............................ .. $ 667 Licence (exempt) ................................ .. 30 X 18,000km : $ 697 20,000km 627 $ 6,784 X 35,000km = Add: CCA on car ............................................. .. $ 1,207 40:0001“ 1,056 3 7,840 HST rebate =13/113 x $7,840 .................................................................... .. Lag Employment income inclusion in year of receipt of rebate [par. 6(8)(c)]: $6784 >< $902 = $781 $7,840 Capital cost reduction in year of receipt of rebate [par. 6(8)(d)]: $1’056 x $902 = $121 $7,840 ——-NOTES TO SOLUTION (1) The imputed interest is based on total days the loan is outstanding for 2010 excluding the day that the loan was actually repaid [31 + 28 + 31]. (2) Anita’s contribution would be fully deductible if both her contributions and Car Parts lnc.’s contributions did not exceed the actuarially permitted amounts [par. 147.2(4)(a)]. (3) Car expenses: Acquired car Leased car Lease costs (see Note (a)) ........................................... .. N/A 35 2,668 Gasoline and oil ............................................................ .. $ 2,880 1,440 Insurance ...................................................................... .. 1,333 667 Maintenance ................................................................. .. 400 240 ‘ Licence ......................................................................... .. 90 30 Interest (see Note (b)) .................................................. .. 118 N/A CCA .............................................................................. .. 1,207 N/A , 3 6,028 3 5,045 Deductible car expenses [pars 8(1)(h) and 8(1)(/)] Acquired car 35,000 km _ 40,000 km X $6028 _ $ 5,275 Leased car 18,000 km _ > 20,000 km X $1045 _ 4 541 Total car expenses 3 9,816 Note (a): The car lease costs are subject to the restrictions in section 67.3. Lease cost —— Lesser of: (a) ($800 x 1.13 x 122/30) — $0 = 3 676 (b) ($920x4months)><$30,000><1.13 85% of the greater of: = 2 668 (i) $30,000 x 1.13 X 100/85 = $39,882 (ii) $55,000 Note (b): The imputed amount of interest is deductible by virtue of section 80.5. The amount is subject to the restriction under section 67.2 that is the lesser of $900 (i.e., $300 >< 90/30) and the $118 deemed paid. The lesser amount is $118. Ill llllll llll' I'll lllll I'll .l_-_I____lll__I-ll__I|-__Il ? I'll. 0‘ ll. I'll x I'll \_ lllll I'll lllll llll llllllllll lMW HHHIIHHHHH llllllllél x: qMLé x3 x3 as i k .N \E .0 . 89> 3805800 >H 00D SON A .23 fl\ Egan-qu 9 $3 EEEBH Bannoan <00 <00 883 00D Esofiméo: CH 003 oSN 4m .ooQ 208 swam I o .‘ mmsfimufififi 8&0 £25088sz $5880: “mfimmomma Egg 8&0 632:5 MOE “$938an 90: SS 4 5% AV» [IL F \E 9me J w¢§§opm <00 - N \ EESQEN BR \K Emng pus ohowwn DOD mOON .Hm .ooQ $35838 . EM 22384 . , .. . u v .- 3 - 8 8505 Sassofiofia mama: 28¢ 35% can @230 833 was 23:0 “0an 82> EEoO >H a? buiEQ mchmea 8&0 SEOQQOHE ANVOHQRVGOwaOE #53 #33800 £2308 23 85 2009 32%:st waifioflzgg \ 7 553%: L x $03 $2-55 , » flay ..m~ ND coocm>t< -w E2395 Problem 2 -—(Advanced) —NOTES TO SOLUTION (1) The customer lists purchased for $4,000, which are expected to be usable indefinitely, are eligible capital property. ‘ (2) She should elect [Reg. 1101(5p)] to include the photocopier in a separate Class 8 from the office furnishings. (3) The maximum cost for Class 10.1 is $30,000 (for 2008) plus GST and PST [Reg. 7307(1)(b)]. PST would be included in the cost. GST would be refundable. There is no recapture or terminal loss on the disposition of a Class 10.1 vehicle [ssecs 13(2) and 20(16.1)]. (4) The $30,000 licence to manufacture, based on patented information, “Tax is a Microcosm of Life on CD" expiring February 29, 2012 can be treated as: (a) a Class 44 asset with CCA claimed on a declining-balance basis at the rate of 25%, or (b) a Class 14 asset with CCA claimed on a straight-line basis over the remaining 1,095-day (3-year) life of the licence, since Regulation 1103(2h) allows a taxpayer to elect that the property not be included in Class 44. Because Class 14 treatment allows for a faster write—off of the cost of the licence, she should elect that the property not be included in Class 44. Class 14 CCA for 2008 is $30,000 x 306/1095 days = $8,384. Class 14 CCA for 2010 is $30,000 >< 365/1095 = $10,000. (5) Some Class 12 items, such as the tools, cutlery and linen in this case, are not affected by the half-year rule. (6) Lesser of: (a) 1/5 capital cost ($9,000) = $1,800 (b) capital cost = $9,000 . . _ $1,500 remammg lease term plus first renewal optlon 3 + 3 The CCA for 2009 is $1,500 x 1/2 x 306/365 = $629. The CCA for 2010 is $1,500. (7) Since the building represents 45% of the total cost of the $200,000, the cost of the building is $90,000. (8) Cl. 10.1: $26,227 x .30 x 1/2 CCA = $3,934 in year of disposition [Reg. 1100(2.5)]. Wit/owl'er Domain/[é] Won/52 ons ea mg a ransactt e een persons no Module 4: Capital cost allowance and eligible arm's length capital property - Learning objective in , \ ,r . L). Wilton (Cr'm I'm-g!) Cato/1 erg/W/ Learning objectives 4.1 Delemtine whether persons are dealing with each other at arm's — Determine whether persons are dealing with each other at arm's length length and the tax consequences of transactions between and the tax consequences of transactions between persons not dealing at persons not dealing at arm's length when there is inadequate arm's length when there ts inadequate consideration, (Level 2) consideration. (Level 2) - Required reading — Text: 6.070 to 6.080 (including Exhibit 6-1); 8,210 to 8,220.30 (including Exhibit 82) (Level 2) — lTA: 69(1), 251(1)to (3), 251(4), 251(6) (Level 2) Explain the rationale of the tax depreciation system. (Level 1) Apply the general rules of the CCA system. (Level 1) - Optional reading — lT:419R2 4.4 Explain the provisions for depreciable capital property transactions when the vendor does not deal at arm's length with the purchaser. (Level 2) 4.5 Determine what constitutes an ECP and the implications of disposing of an ECP. (Level 1) 4.1 Transactions between persons not dealing at arm's length 4.1 Transactions between persons no’tkgealing at arm's length W" Any two corporations: / If they are controlled by the same person or group of persons; ‘l', 'i/ ‘fl wow 5 gal/A gut/[x (flight/V Persons Not dealing at arm's length [subsection 251 (1)] includes — related persons [subsections 251(2) and (3)] — persons who are unrelated but who in fact do not deal with each other at arm‘s length \/ If one corporation is controlled by a person who is related to a person that controls the other corporation; ” - / If one corporation is controlled by a person who is relatedto any member of a related group that controls the other corporation; Subsectiong51L(2) holdsthat the follgwin‘ggersons a e/ MWWk 1 A corporation and M3 _ w J ‘3' A person who controls the corporation; wkg/éwg ‘ ‘7 '3' A member of a related group that controls the corporation; or: Any persons related to a person described above, / If one corporation is controlled by a person who is related to each member of an unrelated group that controls the other corporation; /r- it any member of a rejated group that controls one corporation is related to each member of an unrelated group that controls the other corporation; or r n / If each member of an Uri/related group that controls one corporation ts related to at least onemember 0 an unrelated group that controls the other corporation. 4.2 Ta_x depreciationnsystem 4.2 Tax depreciation system Learning objective - GAAP Vs Tax System at) [mi/t 6/2762} tyrfl . — Exp ain th tionale fthe tax depreciation system. (Level 1) W- Mm” - Tax Depreciation System requires that a distinction be made between N _ ‘ I Z > No” depredab'e Novelty 47M I‘z/‘aftl', d“ . ‘é/Y/ r, ./ (3;)rgf, [in .l 5’ /4» v’ / r J 1 ' > Depreciable propertvyjtl/Z; 3,94 théfifm X}: Required reading — Text: 5,010 to 5,012.30; 5,040.10 (Level 1) — iTA:18(1)(b), 20(1)(a) and (b) (Level1) _ _ «wee/a , I — lTA: Definitions, 13(21): depreciable property (Level 1) > Ehg'b'e Cap'tal Propeny “V’hfii'W/g flag/fizzy; (/13 71/ )4: [i iii/(t2, //) / _{ . M. ,“ £64? 4.3 Capital cost allowance Learning objective Apply the general/rules of the CCA system. (Level 1) Required reading Text: 5,015 to 5035.20; 5.045 to 5.100; 5,150 (Level 1) ITA: 13(1). 13(7)(a) to ((1), 13(26), 20(16). 69(1)(c), 70(5)(b) (Level 1) lTA: 13(4), (7.1), (7.2). and (7.4), 18(3.1) and (3.2), 21, 44(2) (Level 2) lTA; Definitions. 13(21): proceeds of disposition, undepreciated capital cost; 248(1): disposition (Level 1) iTA REG: 1100(1). (2). (2.2 , 3), and (14). 1101(5p), 1102(1), (2). and (3), 1103(29). Schedule ll, c edule l|| (Level 1) Optional reading IT: 128R 4.3 Capital cost allowance Determirflng acquisition cost ("5/ _Capita|cost Vy/y’qwfiflflrm —Subsidies and other forms of assistance —Inducements —Capitalizing interest ~Soft costs //'"21.3 capital cost allowance-Important (\.._, aspects 3) CCA can be claimed on assets acquired at any lime in the taxation year if they are available for use. 4) Most classesare subject to half year rule (50% rule) Except . w N A moles (some items) $13!; “ " I, j b))N6rT—%Trfi's”iength transaction : 71. 11)-x 5) When the taxation year is less than 365 days, the allowable CCA based on the rate must be prorated) Exceptions: W class 14 & class 15 6) CCA claim is not a mandatory deduction i" "“’ " . , ,1: t , m : “ff-v5" my fee-(,2 am: 4.3 Capital cost allowance in general, CCA can be foiloWifi'g‘cond l imed in a taxation year only if the ns are met: the property wasagq lied before the end of the taxation year, “ the property wasflavailable‘f‘gr 13(26)], and \“ seisubsection 4.3 Capital cost allowance-Important aspects Terms: a) CC = Capital Cost for CCA b) CCA = Capital Cost Allowance c) UCC = Undeprecialed Capital Cost lm orlant As ects 1) Assets of the same class are pooled and subject to tbfiaflle rate of CCA / Exceptions: )'|Vu&lrypassenger vehicle (classmi 9:1) 3". gang) h)Maniitactllfing equipment could he placed in a different Class) 2) For most classes, CCA is based on the declining balance method. "M" “““ " Exceptions: ; (Class 3) b) (Class1d) ,m, »"/,~ ' ,tvinpi'tfc A €702 ) ‘” "t "" f/(‘V/(Z’f {(5508 (674,37 // owance-lm New” 4.3 capital cost all _ _, as ects 7) In the year of dlsposmon, no C A claim allowed on the asset getting- disposed. "' 4’s: " " E e tion:Class,1 .1 50“/ xre ular CCA allowed XKp/“v-wzf U «‘1 9 n . 8) On the disposal of all assets of a class, any remaining positive balance of UCC is deductible as "Termina Loss". Exception: Class 10.1 9) On the disposal of an asset of a class, even when other assets remain in the class. there may be a “Recapture” of CCA, if balance in UCC in negative: Exception: class 10.1 10) Recapture and Terminal Loss are regular business income and expense. 11) No capital loss is allowed on disposal of depreciable property Basic Format of CCA & UCC Calculations UCC beginning 3 Add: additions during the year Less: disposition during the year - Lesser of a) Proceeds b) cost UCC before adjustment Less: 50% x Net additions (positive amounts only) Base for CCA calculations Less: CCA based on the rate Add back: 50% x net additions UCC at the end of the year(ier UCC at the beginning of next year) 4.4 Non-arm’s length acquisitions (depreciable property) - Cost to the transferee higher than capital cost of the transferor - Capital cost of transferor exceeds cost to the transferee 4.5 Eligible capital property - in practice, it is easy to identify some types of ECEs, such as — goodwill, incorporation costs, licences. a customer list, or a franchise of unlimited duration. - In brief, an ECE is an expenditure on account of capital — for the purpose of gaining and producing income from a business, other than the cost of tangible property, the cost of intangible property that is depreciable property, and property the cost of which is deductible from income. 4.4 Non—arm’s length acquisitions (depreciable property) - Learning objective —- Explain the provisions for depreciable capital property transactions when the vendor does not deal sitar/mfg, iefiggtyhrwith the purchaser. (Level 2) ),?¥;:€Z5:‘ux L, - Required reading — Text: 8,220.40 (Level 2) — ITA: 13(7)(e) (Level 2) 4.5 Eligible capital property - Learning objective — Determine what constitutes an ECP and the implications of disposing of an ECP. (Level 1) - Required reading — Text: 5,210 to 5,235 (Level 1) — lTA: 14(1), 14(10), 14(11), 20(1)(b) (Level 1) — ITA: Definitions, 14(5): cumulative eligible capital, eligible capital expenditure; 54: eligible capital property (Level 1) - Optional reading - lT: 143R3, 386R 4.5 Eligible capital property Terms — EOE — Eligible Capital Expenditures (total amount) — CEC — 75% x ECE -— CECA — Cumulative Eligible Capital Allowance - Important aspects 1) Only one pool is created for all the ECE. 2) CECA = 7% x CEO. 3) Noitlalj‘Y/ear Rule application _ 7 4) Recapture and Terminal loss rules apply‘ .=:> x’u: iffy/VF sigh/17> , 5) Difference is Recapture and Terminal Loss‘ are included based on capital gain inclusion rate. 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This note was uploaded on 05/16/2011 for the course BSAD 1060 taught by Professor Mumsy during the Spring '11 term at Langara.

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0668_001 - Assignment 1 Module 2 Taxation 1 Problem 15 (A)...

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