Unformatted text preview: ption is exercised immediately, the taxable benefit will be Nil (FMV$10
less the exercise price $10).
As the exercise price is not less than the fair market value of the shares when the option was granted,
Gail is entitled to claim a stock option deduction in computing her taxable income equal to one half
of the taxable stock option benefit included in employment income for the year.
In the year Gail sells the shares, she will have a taxable capital gain equal to one half of the net of
the proceeds and the fair market value of the shares at the purchase date.
Employer-paid club memberships are not taxable benefits by administrative policy where it can be
shown that the membership is principally for the employer’s advantage. In this case it does not
appear to be so. Thus, the club dues paid by Gail’s employer will be included as a taxable benefit in
Gail’s employment income. 61 QUESTION 2 (9 Marks)
Partnership net income for tax purposes:
Net income per income statement
Add: salary paid to Hollie
meals (50% x $1,200)
taxable capital gain (1/2 x $38,000)
Deduct: gain on sale of asset for accounting purposes
Net income for tax purposes $638,000
$626,600 Summary of net income by type:
Property income (interest)
Taxable capital gain 100%
$626,600 Selena’s 50%
$313,300 Additional deductions:
Selena is entitled to claim the following deductions on her tax return against the business income
earned from the partnership.
1) Car expenses:
Car expenses – total
Less non-deductible portion of lease payments
($1,100 - $800 x 1.15) x 12 months
Deduction for car expenses
2) Interest expense: $1,800 3) ½ of CPP on self-employed earnings
4) Tax credits: Selena is entitled to include her share of the $1,000 donation made by the partnership
in calculating her donation credit on her personal tax return. Assuming Selena made no additional
donations, the federal credit would be $119, calculated as follows:
$200 x 16% = $ 32
300 x 29% =
62 QUESTION 3 (7 Marks)
The elected amounts required to avoid recognizing taxable income are:
The non-share consideration cannot exceed the elected amount for each asset. Thus the maximum
amount of debt consideration is $343,000. Preferred shares with a redemption value of $117,000
would be issued.
The preferred shares have a paid-up capital of $1 and an ACB of $1. If the preferred shares are
redeemed, Larry will have a deemed dividend of $116,999. If the preferred shares are sold to a third
party, Larry will have a capital gain of $116,999. Only one half of the capital gain is taxable.
Deemed dividend $117,000
$116,999 Redemption amount
Capital gain $117,000
Nil Sale to third party:
Taxable capital gain $117,000
$ 58,499.50 63 QUESTION 4 (10 Marks)
S&V Enterprises Ltd. and J&K Mfg. Inc. are associated [s.256(1)(e)].
• A related group controls each of the corporations.
• Each of the members of one related group (Stephanie, Victor & Justin) is related to
all of the members of the other related group (Justin & Kristin).
• Justin is a member of both related groups. In respect of each corporation he owns
not less than 25% of the issued shares of any class, other than a specified class.
M&A Sales Ltd. and R&D Wholesaling are not associated. A related group does not control R&D
Wholesaling. Ron and David are cousins and cousins are not related for tax purposes. There is
insufficient information to determine if the anti-avoidance provision in s.256(2.1) is applicable to
this situation. This provision applies where one of the main reasons for the separate existence of
corporations is to reduce tax.
Mears Ltd. and Shared Ltd. are associated [s.256(1)(d)].
• Michael controls Mears Ltd.
• Michael is related to the group that controls Shared Ltd. (Michael & Bob).
• Michael owns not less than 25% of the issued shares of any class, other than a
specified class, of Shared Ltd.
Bars Inc. and Shared Ltd. are associated [s.256(1)(d)].
• Bob controls Bars Inc.
• Bob is related to the group that controls Shared Ltd. (Michael & Bob).
• Bob owns not less than 25% of the issued shares of any class, other than a
specified class, of Shared Ltd.
Mears Ltd. and Bars Inc. are associated [s.256(2)].
• Without this subsection, Mears Ltd. and Bars Inc. would not be associated with each
• Mears Ltd. and Bars Inc. are associated with the same corporation, Shared Ltd.
• Mears Ltd. and Bars Inc. are deemed associated with each other, unless Shared Ltd.
elects not to be associated with either of them.
• If Shared Ltd. makes the election, Shared Ltd. has a business limit of Nil for the year. 64 QUESTION 5 (6 Marks)...
View Full Document
- One '10
- Law, ........., Income tax in the United States