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Unformatted text preview: 08 4.30 4.49 0.85 1.57 2.17 2.69 3.13 18% 5.13 5.15 5.17 5.18 5.20 4.94 4.99 5.03 5.07 5.10 4.49 4.61 4.71 4.80 4.88 3.41 3.71 3.95 4.16 4.34 0.84 1.55 2.14 2.64 3.06 19% 4.89 4.91 4.93 4.94 4.95 4.73 4.77 4.81 4.84 4.87 4.33 4.44 4.53 4.61 4.68 3.33 3.60 3.84 4.03 4.19 0.83 1.53 2.11 2.59 2.99 20% TABLE II ANSWER SHEET Question 1 CANDIDATE NUMBER: ______________ THE INSTITUTES/ORDRE OF CHARTERED ACCOUNTANTS IN CANADA CA RECIPROCITY EXAMINATION DAY ONE - 2002 NOTE: For each of the 4 parts below, indicate your answer by marking an "X" in the appropriate space. DETACH THIS ANSWER SHEET from your question paper and submit it with your other answer papers in the examination envelope provided. Do not submit your examination question paper. DO THIS WRITE IN NOT SPACE Question 1 ANSWER SHEET ______ (i) (a) _____ (b)_____ (c)_____ (d)_____ ______ (ii) (a) _____ (b)_____ (c)_____ (d)_____ ______ (iii) (a) _____ (b)_____ (c)_____ (d)_____ ______ (iv) (a) _____ (b)_____ (c)_____ (d)_____ TOTAL ______ X2 23 THE INSTITUTES/ORDRE OF CHARTERED ACCOUNTANTS IN CANADA CA RECIPROCITY EXAMINATION DAY TWO – 2002 ________________________________________________________________________ (100 marks) (3 hours) NOTES TO CANDIDATES: 1. There are 11 questions and 17 pages in this examination (including the cover page). 2. Do not write your name on your examination envelope or answer papers. Use your candidate number only. 3. To assist in budgeting time during the examination, the number of minutes available for each question (calculated at approximately 1.8 minutes per mark) is shown at the beginning of each question. 4. Answers or parts of answers to examination questions will not be marked if they are recorded on the question paper. 5. It is recommended that you write your responses in ink and write on every other line. 6. Two tables are attached to the examination paper. No other reference sources are allowed. ************ 24 SECTION A - TAXATION Question 1 (12 marks) (22 minutes) Gail Geru is a senior executive with a large public company located in Vancouver, British Columbia. Gail is seriously considering an offer of employment from Textron Inc., a large public company located in Toronto, Ontario. Gail has received a letter outlining a proposed remuneration package. The package is attractive but she has asked you to advise her of the tax consequences before making a final decision. Textron begins its letter with an offer to loan Gail $100,000 interest-free to help finance a new house. Textron will reimburse Gail for all of her moving costs. In addition to an annual salary of $220,000, Textron has offered the following benefits: 1. A luxury automobile will be provided for Gail’s personal use even though she will never require the car for business. The company will pay all of the operating costs, (approximately $2,500 per year), as well as the monthly lease cost of $900. Gail will drive the car approximately 20,000 kilometres per year. 2. Textron will include Gail in its group term life insurance program and pay the premium, which provides $100,000 of coverage. Textron will also pay the premiums for other private health plans including a dental plan and a drug plan. 3. Gail will be eligible for an annual bonus of up to $50,000, with the actual amount to be based on her productivity. The bonus will be awarded each year on the company’s yearend of December 31 but will not be paid until June 30 of the following year. 4. Textron will provide Gail with a monthly allowance of $600 to cover any expenses she may incur in carrying out her duties of employment. 5. All Textron employees are entitled to participate in a stock option plan. The exercise price is $10 per share. Currently, the shares are trading at $10. The share price is expected to rise significantly within two years. 6. Gail will be provided with club memberships in the best social clubs in the area for recreational and relaxation purposes. The company anticipates this will help her to be more productive in her work. Required: Prepare a report to Gail detailing the income tax implications of the proposed remuneration package. 25 Question 2 (9 marks) (16 minutes) Hollie and Selena are equal partners in Lakefield Interiors, an interior decorating business. Lakefield Interiors income statement for the year ended December 31, 2001, shows: Revenue $800,000 Expenses 200,000 Income before gain on asset sale 600,000 Gain on asset sale 38,000 Net income $638,000 Additional information: a) Revenue includes $1,000 interest earned on a GIC; b) Expenses include the following: - salaries paid to Hollie and Selena totalling $6,000; - $1,000 donation to a registered charity; - wages of $2,000 paid to Selena’s son who is employed in the business. He cleans the store on weekends. The $2,000 is considered reasonable. - meals of $1,200 for entertaining clients; c) The asset sale was land originally purchased in hopes of having their own building from which to operate the business. Those plans fell through when the bank refused to...
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