Project
This is the second of two projects that you must complete during this course. Project 2, which covers course content up to Week 5, is due at the end of Week 5.
It is recommended that you read the project details in conjunction with the student course notes to identify areas that pertain to specific events or transactions presented in the project.
There are two questions in this project. Question 1 involves the calculation of net income, taxable income and federal tax payable for Graydon Construction Limited. Question 2 involves the calculation of net income, taxable income and federal tax payable for Carlos Lopez and his family.
Question 1
Graydon Construction Limited (GCL) had the following sources of income for the year ended December 31, 2016:
• Net income for tax purposes includes the following:
o business income from construction business $502,000
o income from interest on seasonal cash in business bank account $2,000
o rental income from operation of small apartment building
(one employee is involved in running this property) $ 42,000
o capital gain on sale of vacant land $500,000
o eligible dividends received on portfolio investments from corporations $ 65,000
o non-eligible dividends received from their90%-owned Canadian $ 200,000
subsidiary, Graydon Investments Inc. (GII). The subsidiary received a dividend refund of $35,000. This subsidiary does not generate active business income.
a dividend refund of $35,000. This subsidiary does not generate active business income.
The following additional information is provided at a year-end meeting with the company:
• The company has a net capital loss carry forward of $262,000.
• The company made charitable donations this year of $ 6,000 (it has not been deducted from business income above of$502,000)
• The company earns all of its income in Canada.
• The balance in the refundable dividend tax on hand (RDTOH) account at December 31st, 2015, is $27,000.
• The company paid a non-eligible dividend of $60,000.
• During 2015, GCL paid a dividend of $50,000 and GCL received a dividend refund of
$2,600.
• The management of GCL tells you that during 2016 two new corporations were incorporated:
1. Graydon Home Limited (GHL) was incorporated as a company for all the GCL shares. Marcin, formerly the sole shareholder of GCL, exchanged his GCL shares for GHL shares and is now the sole shareholder of GHL. In 2016 GHL had taxable and (deemed) active business income of$100,000.
2. Lucinda's Shoes Limited (LSL), was created through the incorporation of Lucinda's retail store which was formerly a proprietorship. Lucinda, Marcin's spouse, is the sole shareholder. In 2016 LSL had taxable income and active business income of
$150,000.
• If either of these companies is determined to be associated with GCL, Marcin has agreed to allow the associated company to utilize as much of the small business limit as is needed to maximize the small business deduction. GCL will use the balance, if any is left.
Required:
For the 2016 taxation year calculate GCL's:
a) net income for tax purposes.
b) taxable income, carryover balances, and explain any restrictions in the use of carryovers.
c) active business income.
d) business limit for purpose of the small business deduction and explain whether GCL is associated with GII, GHL,and/orLSL.
e) aggregate investment income.
f) Part I tax payable.
g) Part IV tax payable.
h) refundable portion of Part I tax.
i) RDTOH balance at year-end.
j) Dividend refund.
k) minimum dividend to declare in 2017 to obtain a full refund of the RDTOH at year-end.
Question 2
Presently it is 2017 and your friend Carlos had an eventful 2016. During 2016 he invested an amount of money received as an inheritance in 2015, continued a business he started in 2015, and had a change in his personal life. Carlos would like your help with the determination of his income for 2016. From the information provided you learned the following:
1. Carlos's ex-wife, Angelica, is employed as a bookkeeper and she earns an annual salary of $55,000. To help Carlos, she prepared an income statement for tax purposes for his proprietorship. You reviewed the statement and supporting calculations, and found them accurate. Net loss from the business for tax purposes in $45,000 in 2015 and $15,000 in2016.
2. On February 28, 2016, Carlos purchased two rental properties in a townhouse complex for $200,000 each. For each property, $50,000 was allocated to the cost of the land. The properties generated rental income of $48,000 in 2016. His expenses associated with these properties totalled $44,000 in this first year.
3. Carlos decided to help out his sister who has set up a Canadian Controlled Private Corporation (CCPC). He purchased shares in her business for $100,000, and at the end of the year he received a non-eligible dividend of $30,000 and a capital dividend of$12,000.
4. He put aside $250,000 in a savings account in his daughter Sofia's name. The account earned $3,500 interest during 2016. Sofia also personally earned$500.
5. In 2008, Carlos purchased a piece of vacant land for $45,000. At the time, he had planned to begin a retail business, and purchased the land as the location for his store. However, as the town grew he received an unsolicited offer and sold the land in 2015 to a developer for $586,000. Carlos agreed to take back an interest-free mortgage on the sale. The developer paid $100,000 in 2015, $250,000 in 2016 and would pay the remainder in 2017. In 2015 Carlos reported income from the sale as a capital gain and claimed a capital gain reserve.
6. Carlos uses a financial advisor to assist him with his investing decisions, and paid this individual $1,500 in2016.
7. Angelica left Carlos in 2015, and he has been paying her support payments of $1,500 per month for all of 2016. He also gave her $250,000 on January 31, when they signed their separation agreement. Carlos does not have a regular full-time job anymore, so he and his ex-wife agreed that he would get full custody of their five- year-old daughter Sofia. Carlos paid $7,000 for child care for his daughter during the year. As well, Sofia went to an overnight summer camp for two weeks at a cost of $1,500 per week.
8. Carlos has RRSP contribution room of $40,000 for 2016. In 2016, he contributed $6,000. In addition, Carlos contributed $15,000 to Sofia's Registered Education Savings Plan (RESP) during the year.
9. Carlos's mother Isabella moved in with him after his wife left. Isabella is a big help around the house. She is 72 years old and receives interest income of $16,917 from her bank account. Isabella is ineligible for Old Age Security payments as she had not lived in Canada before moving in with Carlos and Sofia.
10. Carlos paid the following medical expenses for Sofia, Isabella, and himself during 2016:
Glasses for Sofia $ 500
Prescription medications for Carlos $ 600
Dental fees for root canals for Carlos $ 5,500
Physiotherapy for Isabella $ 3,640
Liposuction for Isabella $ 5,000
Required:
a) Determine Carlos's net and taxable income for 2016. Present all component and alternate calculations even if those where a nil result.
b) Determine Carlos's federal taxes payable for 2016.
c) Explain three features of the RESP Carlos set up for his daughter.