Taxation Project -
There are two projects to complete in Taxation. The first project covers material from Weeks 1 to 3, the second project from Weeks 3 to 5. The first project is due the end of Week 3, the second project is due the end of Week 5.
It is recommended that you read the project details in conjunction with the student notes to identify areas that pertain to specific events or transactions presented in the project.
This project involves the calculation of net employment income for Fatima, deductions against employment income for her husband Gregory, and net business income for Gregory's father George.
Project details -
You are a Chartered Professional Accountant and you have known Fatima Blackburn, a local television personality, for several years. It is February 2017, and Fatima just asked you for help in the determination of her employment income for the past year.
She provided you with the following information for 2016:
1. Her annual salary was $145,000. Her employer deducted the following from her pay:
Canada Pension Plan contributions $2,544
Employment Insurance contributions $955
Employee Registered Pension Plan contributions $5,000
Contributions to group life insurance plan $500
2. Fatima's 2016 T4 slip shows a pension adjustment amount of $10,000.
3. Fatima had a surgery and was off work for six weeks in 2016. During this time, she received $4,500 from her employer provided long-term disability plan that has wage loss replacement. The annual premium for this plan is $500, $250 paid for by Fatima and $250 by the employer. Fatima has been a member of the plan for five years.
4. Fatima received a travel allowance of $1,000 per month and was also reimbursed for actual travel expenses. In addition, for the first six months of the year, she was provided with an automobile allowance of $0.50 per kilometre for when she drove her personal vehicle for work. As of July 1, her employer provided her with a leased Lexus that she was required to use in her employment. Her employer pays the monthly lease payment of $950 (ignore sales tax) and insurance of $150. Fatima drove the car 5,000 km for personal purposes and 6,000 km for business purposes for the six months that she had the car in 2016.
5. With respect to the out-of-town travel, Fatima mentions she always stays at Hilton hotels when she travels, and she was able to get a free room for a week of her personal vacation time because of the loyalty points she had collected with the hotel chain. The points could not be converted to cash, but a week of free hotel accommodation seemed like a great deal to her. Fatima estimates the value of this free week to be $1,500.
6. In 2016, Fatima got a new job at a different location for the same television network. She moved closer to the new television studio in order to minimize her commute. The distance between her old home and work was 75 km, and the distance between her new home and work is 2 km. Her employer assisted her with this move in three ways:
- The employer granted her a moving allowance to cover her moving costs of $10,000.
- As her old home was in a depressed area of town, she was unable to recover her investment in the property when she sold it. The home had cost her $290,000, and she sold it for $235,000. Her employer covered this loss for her.
- The new home cost $500,000, and on March 1, 2016, Fatima's employer advanced her an interest-free loan of $120,000 in order to assist her in purchasing the new home. The prescribed interest rate was 2% for the first quarter of the year and then 3%, 1% and 1% for the subsequent quarters.
7. Fatima's employer provided her with the following benefits:
- A health and dental plan that cost the employer $1,200 in 2016.
- Contributions to a Registered Pension Plan are matched by the employer. Fatima contributed $5,000 which her employer matched.
- The employer provides mental health counselling services. One meeting per month with a social worker, worth $1,800 per year, is paid for by the employer.
- Fatima is able to purchase meals in the employer-run cafeteria, which the employer offers at a deep discount, for less than the cost of the meal. Fatima tells you that she has saved $1,100 during 2016 as a result of this benefit.
- Fatima received a birthday gift of a new watch worth $200.
- An award for long service was presented to Fatima this year. She received an award of this nature three years ago as well. Fatima selected her gift from a catalogue, and chose something worth $1,000.
- Fatima is provided with a golf-club membership worth $2,250. She uses this to golf with her husband on weekends during the spring and summer months, and sometimes golfs with advertisers on her show.
8. Fatima received a handbag worth $2,500 as a gift from one of the advertisers on her show.
9. Fatima is hoping to claim some expenses related to her new home, as she now has a home office set up (separate from Gregory's office, which is described later). She uses her office to do paperwork on a regular basis. The space is not used for any other purpose. She estimates that this office occupies about 10% of the family home. Costs incurred were as follows:
minor home repairs $2,400
utilities $750
insurance $600
property taxes $2,500
10. Other expenses that Fatima was required under her contract to incur during 2016 in completing her employment duties, which she was not reimbursed for, are as follows:
meals with advertisers and other station business contacts $4,000
hotel and travel costs on company business $3,000
parking at the television studio $1,500
membership fee in professional organization $1,100
11. Fatima shows you her 2015 Notice of Assessment which shows a 2016 RRSP contribution room of $24,000. In 2016, she contributed $4,000 to her RRSP.
Fatima also mentions that her husband would like your assistance with a few things. First, he needs to know what expenses he will be able to deduct against his employment income. Gregory is a part-time real-estate agent. He earned $50,000 in commissions in 2016. Gregory also has a home office (separate from Fatima's) that he uses exclusively for work-related activities. He meets with clients at home on a regular basis. In addition, when he is selling properties, he is regularly working away from the office. Gregory pays all of his own expenses, and does not receive any allowances. He incurred the following expenses for 2016:
hotel costs while attending company meetings out of town - $1,500
meals while attending company meetings out of town - $150
meals with clients - $1,100
automobile operating expenses (gas, oil, insurance) employment use is 80% - $2,000
CCA on automobile - $3,200
advertising homes for sale in the local newspaper - $4,000
cost of a client appreciation event at the local movie theatre - $1,000
new laptop computer - $1,400
home-office expenses (about 10% of the home is used as an office)
- minor home repairs - $2,400
- utilities - $750
- insurance - $600
- property taxes - $2,500
Gregory's father George also needs your help to determine his income from his unincorporated business, George's Portable Signs. The business makes and installs portable signs for a vriety of businesses. It operates out of a building that George owns. There is also a leased warehouse space where unused signs are stored. George provides you with the following information about his capital assets, including additions and disposals during 2016:
On January 1, 2016, the undepreciated capital cost (UCC) for each class of assets was as follows:
Class 1 building $220,000
Class 8 office furniture and equipment $60,000
Class 10.1 George's car $12,495
Class 12 small tools $5,000
Class 13 leasehold improvements $19,500
The building, which cost $250,000 in 1997, was sold for $195,000 during 2016. This building was on leased land. It was the only building in Class 1 at the time of its sale. The sale of this building resulted in a loss on disposal of $35,900 which is included in "Other income and expenses" on the income statement. Subsequent to the sale of this building, land was purchased for $100,000 and a new building was constructed in 2016 at a cost of $500,000, which is used 80% for manufacturing and 20% for office space.
New office furniture was purchased for $30,000 on September 30. This purchase replaced old assets, which were sold for $6,000. All of this old furniture was sold at a price less than its original cost.
Some small tools, which cost less than $500 each, were sold for a total of $6,000. All of these tools were sold at a price less than their original cost.
The opening balance in Class 13 represents leasehold improvements of $24,000 made to the leased warehouse during 2014. During 2016, further leasehold improvements were made to the same leased warehouse at a cost of $38,000. The lease was signed in 2014 for a term of five years with two successive three-year renewal terms.
George purchased two vehicles during 2016 for the business. One of the vehicles was a replacement for the Class 10.1 vehicle driven by himself. The old vehicle was sold for $20,000. The replacement vehicle cost $52,000. A second vehicle was purchased for use by office staff at a cost of $23,000.
George provided the following income statement for your use:
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George's Portable Signs Income statement For the year ended December 31, 2016
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Sales
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$1,500,000
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Cost of sales
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1,100,000
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Gross profit
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400,000
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General and administrative expenses
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(150,000)
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Selling expenses
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(45,000)
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Income from operations
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205,000
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Other income and expenses, including losses on disposal of assets
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16,000
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Net income
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$221,000
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You reviewed this statement with George, and made the following notes:
1. Insurance expense includes the following amounts:
a) For collateral on a bank loan, the company paid $500 in premiums for a $200,000 insurance policy on George's life.
b) $4,000 in group term life insurance premiums were paid for employees and are included in salaries and benefits.
c) The remaining expenses were for insurance on the buildings and equipment owned by the business and business liability insurance totalling $2,000.
2. Professional fees for the year include the following expenses:
Cost incurred to defend the company against a wrongful dismissal charge - $9,600
Routine legal and accounting fees - $5,000
Legal fee for drafting George's will - $650
3. General and administrative expenses include landscaping around the new building for $9,500.
4. A review of the other expense accounts included in general and administrative expenses showed the following:
Depreciation and amortization - $17,000
Interest on late payment of income taxes - $200
Loss from theft by accounting clerk - $2,100
Donations to registered charities - $500
5. On December 31, 2016, the company declared a bonus payable to the manager of $5,000. This bonus will be paid on March 31, 2017. It has not been recorded on the income statement.
6. The following information was taken from the various selling expense accounts:
Cost of sponsoring presentations at a local theatre company - $1,500
Hockey game tickets given to customer - $800
Meals and entertainment costs of sales people - $9,500
Staff Christmas party and staff summer barbeque - $4,800
Cost of sponsoring the local little league team - $750
Club dues at a local golf course - $2,700
Meals purchased for clients at golf courses - $1,300
Required:
a) Determine Fatima's net employment income for tax purposes for 2016. Show all your calculations. Briefly explain why any items listed have been omitted from your calculations.
b) Determine Fatima's RRSP deduction limit for 2017. Show all your calculations.
c) Determine Gregory's deduction for expenses against his employment income, both as a sales employee and a non-sales employee. How much should he deduct? Briefly explain why any items listed have been omitted from your calculations.
d) Determine the maximum CCA deduction for George's business for the year. Show opening and ending UCC as well as any additions and disposals, CCA, terminal losses, recapture and capital gains that result from the information provided.
e) For George's business, prepare a reconciliation of accounting income to net income for tax purposes starting with net income for accounting purposes and adding and subtracting items as needed. Provide explanations for omitted items.
Assignment Files -
https://www.dropbox.com/s/7kdgiwaby8mbel4/Taxation%20Project%20Assignment%20Files.rar?dl=0