Assignment -
It is now late December 2016 and you, CPA, have just finished meeting with your clients, Mr. Edwards and Tom Jones, and your partner, Gerry. Mr. Edwards is a non-resident of Canada for tax purposes and he owns 75% of the shares of Edwards Operations Inc. (EOI). Tom Jones, a resident of Canada for tax purposes, owns the other 25% of the shares of EOI. Tom is not related to Mr. Edwards and Tom and Mr. Edwards deal with each other at arm's length.
Mr. Edwardsis the CEO of EOI and Tom Jones is the COO (chief operating officer) of EOI. Additional information about your clients and EOI is provided in Exhibit I.
Mr. Edwards has just signed an agreement to purchasea newly built house in Canada that he will rent out. The home will be purchased on January 1, 2017 and it will be rented out starting on January 1, 2017. Additional information about Mr. Edwards' Canadian rental income is provided in Exhibit II.
Gerry wants you to draft a memo to him discussing whether EOI is a resident of Canada for tax purposes in 2016. Gerry also wants you to discuss any 2016 Canadian income tax consequences that EOI, Mr. Edwards and Tom Jones will have related to funds paid by EOI to Mr. Edwards and/or to Tom Jones. When discussing the 2016 Canadian income tax consequences Gerry says to assume that EOI is a resident of Canada for tax purposes. Gerry wants you to explain why or why not there are (or are not) any 2016 tax consequences. Gerry says you do not have to discuss the tax consequences relating to any salary or dividends that EOI pays since your clients already understand this. You can ignore paragraph 214(3)(a) of the Act; i.e., you can ignore the Part XIII tax that can apply to benefits or loans made to non-residents. Finally, Gerry wants you to discuss any 2017 Canadian income tax consequences with respect to Mr. Edwards' new Canadian rental property. If you have any recommendations that will reduce Mr. Edwards' Canadian income tax obligations with respect to his rental property, then you should provide them.
Gerry says you can ignore provincial income taxes, ignore foreign taxes and ignore any income tax treaties. Gerry reminds you to explain your answers, show all your detailed calculations and give Income Tax Act (ITA)section, subsection and paragraph (where applicable) references and Income Tax Regulations section and subsection references in order to support your answers. When giving references you must be specific. Do not just list multiple references!
Exhibit I - Additional Information EOI, Mr. Edwards and Tom Jones
- Edwards Operations Inc. (EOI) is a private company that was incorporated in Canada in 1964by Mr. Edwards' father. Mr. Edwards received his father's shares upon the death of his father in 2002
- Tom Jones purchased 25% of the shares of EOI from Mr. Edwards in 2010
- EOI has a December 31st year-end and it carries on business in the United States and in Europe
- EOI's board of directors (BOD) hold meetings each quarter and this is where they make all significant corporate decisions. In 2010, all BOD meetings were held in Canada. In all other years (except for 2010) the BOD meetings were held in the United States
- On February 3, 2016, EOI paid $8,000 to Tom Jones to reimburse him for funds he spent on his vacation with his spouse. No business was conducted during this vacation
- On March 15, 2016, EOI paid $5,000 to Tom Jones to reimburse him for business travel expenditures that he incurred as part of his employment duties
- On November 1, 2016, EOI lent $45,000 to Tom Jones and $65,000 to Mr. Edwards. The loan was used by both men to invest in public company shares. The loan agreements are in writing and the loans are non-interest bearing
- Mr. Edwards will not repay any of the loan principal for 3 years
- Tom Jones will repay the loan in full by December 31, 2017. In early 2018 Tom Jones will borrow another $45,000 from EOI. No other employees of EOI are eligible to receive loans from the company
- Assume all expenditures are reasonable unless otherwise indicated
- Assume the prescribed interest rate is 1% at all times
Exhibit II - Additional Information Mr. Edwards' Rental Property
- Mr. Edwards'2017 rental income is property income; i.e., heis not running a business
- Mr. Edwards has prepared the following, and you can assume that all the expenses below are paid in 2017 and are reasonable:
Mr. Edwards' ForecastedCanadian Rental Income - For the year-ended December 31, 2017
Gross rental revenue ($3,500 per month) $42,000
Mortgage interest ($2,000 per month) $24,000
Property taxes ($600 per month) $7,200
Maintenance and repairs ($500 per month) $6,000
Insurance ($175 per month) $2,100
Total expenses $39,300
Net income $2,700
Note - The cost of the new home purchased on January 1, 2017 is $1,000,000. Mr. Edwards wants to claim the maximum CCA.