Question 2 – 12 marks

Part 1 – 4 marks
What is the difference between tax avoidance and tax deferral / Planning?

Tax avoidance is a form of tax planning in which the taxpayer, through means that are
within the boundaries of tax legislation, arranges his affairs in a manner that allows him
to receive benefits without the payment of taxes. Tax planning to achieve tax deferral
involves either the delayed recognition of income, or the accelerated recognition of
deductions. The payment of tax is delayed, as opposed to permanently avoided

Part 2 – 4 marks

By making all instalments on the basis of the CRA’s instalment reminder – method 3, the
taxpayer is assured that no interest will be assessed for deficient instalments. However, this
may not be the best alternative for making instalment payments. Explain why this is true.

The CRA’s instalment reminder results in total instalment payments equal to the net tax
owing in the previous taxation year. If the estimated net tax owing for the current year
is less, lower instalments could be paid using the estimated current year net tax owing as
the base.

Part 3 – 4 marks
Describe the advantages to an employer of hiring independent contractors, as opposed to hiring
employees.

• Using independent contractors eliminates the need for payments for CPP, EI, and
payroll taxes (where applicable).
• Independent contractors generally do not receive fringe benefits.
• Organizations are not committed to retain independent contractors beyond the
current need for their services.
• Organizations are, in general, not legally responsible for the work of independent
contractors.

Question 3 – 12 Marks
Ken Gray runs a small proprietorship (Ken's Fish) which specializes in fishing gear. He has
provided you with the following information:
Sales $150,000
Cost of goods sold* 80,000
Advertising in a local paper 1,000
Advertising in a U.S. newspaper directed at Canadians living in the U.S. 2,000
Meals and entertainment 10,000
Property taxes on a vacant piece of land (which earns no income) adjacent 2,500
to the business
Golf course fees for Ken 1,500
Cost of one convention held on a cruise ship in the Mediterranean Sea 2,000
sponsored by a Canadian fishing association.
(*All closing inventory is valued at market value.)
Required:

A) Calculate the net income for tax purposes for Ken's Fish.
B) Explain why any items have been omitted.
C) Briefly discuss how your answer in A) would change if Ken had valued his inventory at
cost, no calculation required

Solution
1) A)

Revenue $150,000
Cost of goods sold (80,000)
Advertising (1,000)
Meals and entertainment (5,000)
Net income for tax purposes $ 64,000

B) Omitted items:

• Advertising in an American newspaper is not deductible when the targeted market is

Canadian. S.19
• Half of the meals and entertainment are not deductible. S 67.1
• Property taxes on vacant land is only deductible to the extent that income is earned.
S.18(2), (3) The amount can be added to the cost base of the land.
• Recreational fees are not permitted as deductions. S.18(1)(l)
• The convention is not within the territorial scope of the organization hosting the
conference, therefore, it is not an allowable deduction. S.20(10)

C) The Income Tax Act requires that closing inventories be valued at either:

1) the lower of cost or market value of each item, or

2) market value of all items of inventory.

Ken would need to value his inventory as per these provisions, which could affect the
balance of the company's cost of goods sold and net income for tax purposes.

Question 4 - 10 Marks
For its taxation year ending December 31, 2018, Axel Ltd. has determined that its Net Income
for Tax Purposes, before any deductions for CCA, amounts to $42,000. The Company does
not have any Division C deductions, so whatever amount is determined as Net Income for Tax
Purposes will also be the amount of Taxable Income for the 2018 taxation year. On January 1,
2018 the Company has the following UCC balances:

Class 1 (Two Buildings), rate 4% $462,000

 Class 13*, straight line $94,500
Class 10, rate 30% $139,000

*This balance reflects leasehold improvements made on January 1, 2016 at a total cost of
$126,000. The original term of the lease was 4 years. However, there are two available
renewal options, each allowing Axel Ltd. to renew for a period of two years.

During 2018, the cost of additions to Class 10 amounted to $76,000, while the proceeds from
dispositions in this class totalled $58,000. In no case did the proceeds of disposition exceed
the capital cost of the assets disposed of, and there were still assets in the class as of December
31, 2018. There were no acquisitions or dispositions in either Class 1 or Class 8 during 2018.

Required: Calculate the maximum CCA that could be taken by Axel Ltd. for the taxation year
ending December 31, 2018. Your answer should include the maximum that can be deducted
for each CCA class.

Class 1 Class 13 Class 10

Opening Balance $462,000 $94,500 $139,000
Additions Nil Nil 76,000
Proceeds Of Disposition Nil Nil ( 58,000)
One-Half Net Additions Nil Nil ( 9,000)
CCA Base $462,000 $94,500 $148,000
CCA Rate 4% See Note 30%
Maximum CCA $ 18,480 $21,000 $ 44,400

Note CCA on Class 13 would be calculated by the dividing the cost of the leasehold improvements by the
original term of the lease, plus one renewal period. This gives $21,000 [$126,000 ÷ (4 + 2)] per year.

This gives a maximum amount for CCA of $83,880 for the taxation year ($18,480 + $21,000 + $44,400).

Question 5 – 20 Marks

Joan is employed by a large public corporation at an annual salary of $122,000. In addition,

during 2018, she earned commissions of $46,000. Her employer withholds the following
amounts from her income:

RPP Contributions $2,700

EI 858
CPP 2,594
Professional Association Dues 1,500
Joan’s employer makes a matching contribution to her RPP of $2,700.
Her employer requires her to maintain an office in her home and has provided her with a signed
Form T2200. The office occupies 15 percent of the floor space in her home. The 2018 costs
of operating this property are as follows:

Maintenance And Utilities $2,200

Property Taxes 4,800
Insurance 950
 Mortgage Interest 9,800
Several years ago, Joan’s employer granted her options to buy 2,000 shares of the company’s
stock at a price of $20 per share. This was the market value of the shares at the time the options
were granted. In January, 2018, when the shares are trading at $32 per share, Joan exercises
all of the options. In December, 2018, the 2,000 shares are sold for $35 per share.
Joan’s employer pays her an allowance of $1,500 per month to cover all of her employment
related expenses, including her use of an automobile that she owns personally. Ignoring any
CCA calculations, during 2018, only 60 percent of the automobile usage was employment
related. Joan’s employment related expenses during the year are as follows:

Automobile Operating Expenses $4,200

Hotels 5,500
Airline And Other Transportation 7,600
Business Meals And Entertainment 6,400

Joan owns a painting with an adjusted cost base of $2,000. During 2018, she sells this painting
for $22,000.

Required: Calculate

1. Her Net Employment income . If an amount is non-taxable , please indicate the amount
and explain the reason.
2. Amount of Taxable capital gain if any.
NOTE : Marks will be allocated based on three main factors:
• The proper format
• The supporting explanation and calculations
• The Correct number

Joan’s commission income of $46,000 is large enough not to limit the deduction of her employment related
expenses. The required calculations here would be as follows:
Salary $122,000 - 1 mark
Additions
Commissions 46,000 - 1 mark
Expense Allowance [(12)($1,500)] 18,000 - 1 mark
Stock Option Benefit [(2,000)($32 - $20)] 24,000 - 2 mark
Deductions:
RPP Contributions ( 2,700) - 1 mark
Professional Association Dues ( 1,500) - 1 mark
Home Office Expenses (Note 1) ( 1,193) - 2 marks
Automobile Costs
Operating Costs [(60%)($4,200)] ( 2,520) - 2 marks
Hotel Costs ( 5,500) - 1 mark
Airline And Other Transportation ( 7,600) - 1 mark
Business Meals And Entertainment [(1/2)($6,400)] ( 3,200) - 1 mark
 Net Employment Income Total 17 marks max 16 $176,759 - 1 mark

Note 1 As Joan has commission income, she can deduct 15 percent of all of the costs except the mortgage
interest. This will provide a deduction of $1,193 [(15%)($2,200 + $4,800 + $950)].

Net Taxable Capital Gains – Total 5 marks Max 4 marks

The required calculations here would be as follows:
Stock Option Shares [(2,000)($35 - $32)] $ 6,000 1 mark
Painting ($22,000 - $2,000) 20,000 1 mark
Net Capital Gains $ 26,000 1 mark
Inclusion Rate 1/2 1 mark
Net Taxable Capital Gains $13,000 1 mark

Multiple Choice

1) When assessing the value of a corporation, the most relevant information that decision-
makers normally consider is
A) cash flow before-tax. B) the potential for after-tax profits.
C) the potential for before-tax profits. D) the current corporate tax rate.

2) Susan was provided with a company car to drive from March 1st to December 31st of the
current year. The car cost the company $22,000, plus GST (5%) and PST (6%). Susan drove
the car a total of 15,000 kilometres during the year. 11,000 kilometres were for business
purposes and the other 4,000 kilometres were for personal use. Susan's employer pays for
all of the vehicle's operating costs which totaled $1,100. What is the minimum amount that
Susan will report in total taxable benefits as a result of the above information? (Round your
answer to the nearest dollar.) 2) _____

A) $1,758 B) $1,172 C) $2,212 D) $6,901

3) Which of the following expenses would be denied as a deduction as per the provisions of
the Canadian Income Tax Act? 3) _____

A) Legal and accounting fees incurred during the construction of a building.

B) Advertising costs in a non-Canadian newspaper directed at an American market.
C) Work space in a home used as a taxpayer's principal place of business.
D) Maintenance fees on a yacht at Yellow Yacht Leasing Inc.

4) Which of the following statements regarding recapture is true? 4) _____

A) Recapture only occurs when there is a positive balance in a class pool and that pool of
assets is empty.
B) Recapture occurs when there is a positive balance in a class pool, even if there are assets
remaining in that class pool.
C) Recapture may be deducted from business income.
D) Recapture occurs when there is a negative balance in a class pool, even if there are assets
remaining in that class pool.

5) Which of the following cases is not eligible for capital cost allowance in the current year?
5) _____
A) An employee owns and uses an automobile in the course of her employment duties
during the month of December. Her pay for December is not received until January of the
following year.
B) A piece of equipment was purchased during the year on a 5 year financing term.
C) A new engine is installed in a semi-trailer that is used to haul produce to the United
States.
D) A building under construction is scheduled for completion in eighteen months. The
building will be used as a production facility.

1) B

2) A

3) A

4) D

5) D