Minimizing the tax liability for the family

Question

Assignment Task:

Bruno Andino and Sylvia Andino are your tax clients. They have been married for six years. Sylvia has progressed quickly in DaveCo, the large, publicly traded firm she is working for, due to her strong tax and accounting background. Her firm has an excellent health and dental plan (cost-shared with employees) that reimburses most medical and dental expenses with few limitations.

Personal Information	Taxpayer	Spouse
Title	Ms.	Mr.
First Name	Sylvia	Bruno
Last Name	Andino	Andino
SIN	527-000-129	527-000-079
Date of birth (Y/M/D)	28-12-90	29-01-64
Marital status	Married	Married
Canadian citizen?	Yes	Yes
Provide information to Elections Canada?	Yes	Yes
Own foreign property of more than $100,000 Cdn?	No	No

Taxpayer's Address:

123 ABC Street, Calgary, AB T2G 1A1

Phone Number [phone]

Spouse's address same as taxpayer? Yes

Dependent Children:
First Name	Jessica	Argos
Last Name	Andino	Andino
SIN	527-000-319	527-000-186
Date of birth (Y/M/D)	24-06-11	22-09-15
Net income	Nil	Nil

Bruno earns business income writing and editing instruction manuals on a contract basis. He has six different clients and operates under the unincorporated business name Crystal Clear Communications from an office in their home.

During the 2019 calendar year, Bruno was a full-time student at City Centre University for four months (16 weeks). He is taking courses in child psychology in order to help deal with Sylvia's daughter, Jessica, who has been diagnosed with a severe mental disability that qualifies her for the disability tax credit.

Business Income - Bruno:

Revenues	72,980.77
Membership dues - Business Writers' Association	461
Business insurance	606.65
Bank service charges	110
Charitable donation to United Way	1,500.00
Cell phone air time (for business)	960.5
Postage and courier charges	162
Supplies	1,760.73
Separate business phone line charge	798.69
Fees for accounting and tax advice	1,275.00
Air fare (business travel)	2,520.71
Hotels (business travel)	1,308.21
Meals when traveling on business	1,375.23
Meals and drinks when entertaining clients	3,879.20
Golf green fees while playing with clients	750
UCC of furniture - beginning of year (Class 8)	2,350.00
UCC of computer application software (Class 12) - beg. of year	824
UCC of computer hardware (Class 50) - beginning of year	2,640.00
Application software purchased December 1, 2019	2,006.00
Laptop computer purchased July 1, 2019	2,449.00
Business Use of House Costs:
Area of home used for business (square feet)	300
Total area of home (square feet)	2,700
Gas	2,651.51
Electricity	1,343.93
Insurance - house	1,500.44
Snow plowing contract	500
Furnace repairs	1,500.00
Painting of house interior	2,400.50
Mortgage interest paid to Royal Bank	8,725.83
Mortgage life insurance premiums (not for collateral)	600
Mortgage principal paid	3,750.50
Property taxes	5,106.64
Interest on late property taxes	25.83

Tax Software Note: As the problem requires that you ignore GST/HST implications, enter all motor vehicle expenses as non-eligible for GST or HST.

Vehicle Costs: (all annual costs)

 Description - BMW 330i, cost = $53,700, bought 2016-02-15

January 1 odometer                                                                           44,800 km

December 31 odometer                                                                     62,800 km

Business kilometers driven                                                               10,500 km

Parking                                                                                              $391.15

Gas                                                                                                     $3,050.00

Maintenance and repairs                                                                    $654.54

Car insurance                                                                                     $1,789.00

License and registration fees                                                              $84.00

Interest on car loan granted on purchase date                                    $2,140.37

UCC of Class 10.1 - beginning of year                                              $15,550

T2202A - Bruno

	BOX	AMOUNT
Tuition fees	A	$4,400
Number of Months - Part-time	B	0
Number of Months - Full-time	C	4

NOTE: Assume 16 weeks for childcare

Bruno was previously married and has a 20-year-old daughter from the previous marriage. As part of the property settlement, he received the house that he and his family had lived in. Since Sylvia already owned a much nicer home, he moved in with her when they were married in 2013 and rented out the other property. The details of his rental property are as follows:

Address - 767 Stampede Street, Calgary, AB, T3M 5G5

Gross rents
$18,000.00
Property taxes
5,625.00
Insurance
1,990.00
Utilities
1,245.00
Interest on mortgage
4,768.22
Payment on principal
3,149.44
Repairs and maintenance
3,262.43
Snow removal and landscaping annual contract
600
Building purchased May 1, 2004 for $290,000 - UCC beginning of year
290,000.00
Appliances purchased June 6, 2015 for $6,500 - UCC beginning of year
2,995.00

Bruno believed that, in June, he had paid an income tax installment of $10,000 for 2019, but he could find no record of it. You called the CRA and find that the June payment was towards his 2018 tax liability. Bruno had tax owing of more than $15,000 for 2018 and has not completely paid off the liability yet. He actually has paid $3,500 in installments for 2019.

During 2017, one of his clients convinced Bruno to take out a demand loan to purchase shares in a public company, Big Gain Ltd., for $80,000. Later that year, the company's president was indicted for fraud. In early 2018, Bruno sold his shares for $2,000 and used the proceeds to pay down his demand loan. (This resulted in a net capital loss carry-forward at the end of 2018 as Bruno did not have any taxable capital gains that year.) During 2019, Bruno did not have sufficient funds to pay off the demand loan, but he managed to reduce the principal by $20,000.

The interest and penalties paid by Bruno during 2019 were as follows:

Interest on credit cards for business expenses	$475.23
Interest on loan to buy laptop and software for business	226.17
Interest on loan to make 2018 RRSP contribution	195.9
Interest on loan to purchase Big Gain Ltd. Shares	4,200.00
Interest & penalty on late payment of 2018 income tax	153.75
Interest on insufficient tax installments for 2019	28.85
Interest on late GST/HST payments	90.92

Sylvia has invested in the stock market over the years and has done well. Bruno sold one investment in shares of a public company (Cannabis Solutions Inc.) recording a capital gain of $25,000 (Proceeds of $100,000 less ACB of $75,000) during 2019. Sylvia has received her T3 and T5 information slips from her stockbroker and bank. The interest from the TD Bank is from a joint savings account in the name of both Sylvia and Bruno.

T5	BOX	Slip 1	Slip 2
		Flower Corp. Sylvia	TD Bank
Issuer Recipient
Actual amount of eligible dividends	24	$2,000.00	Joint 50% each
Taxable amount of eligible dividends	25	$4,140.00
Interest from Canadian sources	13		$1,010.12

 

T3	BOX	Amount
Issuer - TD Asset Management Recipient - Sylvia Andino Foreign country - United States
Foreign non-business income (Canadian dollars)	25	$1,506.86
Foreign income tax paid - investment (Canadian dollars)	34	$151.00
Other income - interest	26	$537.00
Actual amount of eligible dividends	49	$750.00
Taxable amount of eligible dividends	50	$1,035.00

Sylvia also received the following T4 from her employer:

Sylvia - T4	BOX	Amount
Issuer - DaveCo
Employment income (includes option)	14	$175,500.00
Employee's CPP contributions	16	2,748.90
Employee's EI premiums	18	860.22
RPP contributions	20	5,000.00
RP Plan registration number	50	87675644
Pension adjustment	52	10,000.00
Income tax deducted	22	62,455.44
Stock option deduction 110(1)(d)	39	5,250.00
Charitable donations	46	3,900.00
Medical plan premiums	85	3,525.00

Sylvia paid no installments for 2019 as she has received tax refunds in the last two years. Sylvia had options to purchase 500 shares of DaveCo at $45 per share. When she received the options, the shares were trading at $40 per share. On December 20, 2019, when the shares were trading at $150 per share, she exercised her options for 100 shares. (Note: the taxable benefit is included in her T4.)

The Andino family also incurred medical expenses not covered by Sylvia's plan as follows:

Orthodontist for Jessica	$10,300.00
Other medical expenses for Jessica	$7,520.00
Prescription drugs for Argos	$430.00
Medical marijuana for Bruno	$4,980.00

Bruno's mother, Candace Andino, who is infirm, also lives with the family and is dependent on Bruno and Sylvia. Her net income (not including any adjustments you might make) was $9,110 and Bruno paid

$4,015 in medical expenses on her behalf. Her birth date is January 13, 1946. (You do not have to do her tax return.)

When Sylvia's grandmother died in 2015, she inherited some pieces of jewelry, as well as a dining room set and a chandelier. Since the jewelry is not suited to Sylvia's modern style of dress, she sold some pieces during 2019. She replaced the dining room set and chandelier and sold them separately to two colleagues at work.

Asset Dispositions	Disposition #1	Disposition #2	Disposition #3
Description	Diamond Pendant	Gold Ring	Pearl Broach
Year of acquisition	2015	2015	2015
Date of disposition	Jul-20	Jul-20	Jul-20
Proceeds of disposition	$7,400.00	$870.00	$960.00
FMV at grandmother's death	$6,000.00	$265.00	$1,700.00

 

Asset Dispositions	Disposition #4	Disposition #5
Description	Dining room set	Crystal chandelier
Year of acquisition	2015	2015
Date of disposition	Jul-20	Jul-20
Proceeds of disposition	$3,400.00	$680.00
FMV at grandmother's death	$3,000.00	$1,900.00

Bruno has made all of the required payments to his ex-wife, Sheeza DeVille, in 2019. In your files, you have noted that his 2012 divorce agreement requires Bruno to pay spousal support to his ex-wife of $1,000 per month. He also pays her child support of $700 per month for his 20-year-old daughter, Faith.

Sylvia tells you that her parents have established a family RESP for Jessica and Argos in 2019, and are the sole contributors. They have contributed $4,500 in lieu of Christmas and birthday presents. Sylvia does not know much about RESPs and wonders if this is a good idea and how it may affect her and Bruno's taxes. She is also heard that there is some sort of disability savings plan that she could start for Jessica and wonders whether that would be a good thing to do.

Sylvia has also learned that Bruno's mother purchased Canada Savings Bonds in Jessica's name in 2018. The bonds paid interest of $145 in 2019 which Bruno had spent without advising her. She expects a T5 to be issued in Jessica's name.

Bruno and Sylvia also paid for childcare for Jessica and Argos during 2019. (Note that in addition to being in school fulltime, Bruno also served 3 weeks of prison time in 2019 for possession of marijuana with intent to distribute.) The amount and details for childcare are as follows:

Child	Organization Name	# of weeks	Amount
Argos	Little Lambs Daycare Inc.	48	$15,000.00
Jessica	No Worries Childcare Inc. (after-school and summers)	48	$6,700.00
Jessica & Argos	Clarke Griswold (babysitter)	2	$890.00

On January 10, 2020, you receive a phone call from Sylvia Andino. She has just received a T4RSP in the mail which shows that Bruno had withdrawn $30,000 of funds from his RRSP in 2019 without her knowledge. She knows this could substantially increase Bruno's tax liability and is very concerned. (She also mentions Bruno's continued use of cannabis products has greatly increased his spending in this area, including a doubling of the family's snack budget.) She provides you with the following T4RSP and RRSP receipt for the contributions that she has already made, as well as information related to her RRSP limits.

RRSP Contribution Information - Sylvia	(Y-M-D)	Amount
Issuer of receipt - TD Asset Management (March - Dec 2019)	27-12-19	$9,900
Issuer of receipt - TD Asset Management (First 60 days of 2020)	09-01-20	$15,500
Unused deduction room at the end of 2017		$25,750
Earned income for 2018		$160,000

 

T4RSP - Bruno
	BOX	AMOUNT
Issuer of receipt - Royal Bank Withdrawal payments
	22	$30,000
Income tax deducted	30	$9,000

REQUIRED:

With the objective of minimizing the tax liability for the family, prepare Sylvia's 2019 income tax return and Bruno's 2019 return using tax software (preferably TaxFreeway). You may submit either the tax return file (if using TaxFreeway, this is the .X19 file) or a paper copy if using another program (Sent in pdf format).

In a separate Word document (pdfs are not accepted), list any assumptions you have made and provide any explanatory notes for calculations and tax planning issues you feel should be placed in the file to be shared with the Andino family. (No more than 2 - 4 pages should be necessary.) Include any carry-overs that may result from the 2019 tax return as well.