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Club memberships employer paid club memberships are

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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. Club memberships: 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 charitable donation 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 6,000 1,000 600 19,000 664,600 (38,000) $626,600 Summary of net income by type: Business income Property income (interest) Taxable capital gain 100% $606,600 1,000 19,000 $626,600 Selena’s 50% $303,300 500 9,500 $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 $15,400 Less non-deductible portion of lease payments ($1,100 - $800 x 1.15) x 12 months (2,160) 13,240 Business use 30% Deduction for car expenses $ 3,972 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% = 87 $500 $119 62 QUESTION 3 (7 Marks) The elected amounts required to avoid recognizing taxable income are: Asset Elected Amount Land $ 100,000 Building 243,000 Goodwill 1 Total $ 343,001 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. Redemption: Redemption amount PUC Deemed dividend $117,000 (1) $116,999 Redemption amount Deemed dividend Proceeds ACB Capital gain $117,000 (116,999) 1 (1) Nil Sale to third party: Proceeds ACB Capital gain Inclusion rate Taxable capital gain $117,000 (1) 116,999 x½ $ 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 other. • 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)...
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