TAXATION MID-TERM EXAM
QUESTION 1 - Mr. Brooks is employed as a financial analyst by a large Canadian public firm located in Winnipeg. During 2017, his basic gross salary amounts to $63,000. In addition, he was awarded an $11,000 bonus based on the performance of his division. Of the total bonus, $6,500 was paid in 2017 and the remainder is to be paid on January 15, 2018.
During 2017, Mr. Brooks' employer withheld the following amounts from his gross wages:
Federal Income Tax $3,000
Employment Insurance Premiums 931
Canada Pension Plan Contributions 2,480
Registered Pension Plan Contributions 2,800
Donations To The United Way 480
Union Dues 240
Payments For Personal Use Of Company Car 1,000
Other Information:
1. Due to an airplane accident while flying back from Thunder Bay on business, Mr. Brooks was seriously injured and confined to a hospital for two full months during 2017. As his employer provides complete group disability insurance coverage, he received a total of $4,200 in payments during this period. All of the premiums for this insurance plan are paid by the employer. The plan provides periodic benefits that compensate for lost employment income.
2. Mr. Brooks is provided with a car that the company leases at a rate of $678 per month, including both GST and PST. The company pays for all of the operating costs of the car and these amounted to $3,500 during 2017. Mr. Brooks drove the car a total of 35,000 kilometers during 2017, 30,000 kilometers of which were carefully documented as employment related travel. While he was in the hospital (see Item 1), his employer required that the car be returned to company premises.
3. On January 15, 2017, Mr. Brooks received options to buy 200 shares of his employer's common stock at a price of $23 per share. At this time, the shares were trading at $22 per share. Mr. Brooks exercised these options on July 6, 2017, when the shares were trading at $28 per share. He does not plan to sell the shares for at least a year.
4. In order to assist Mr. Brooks in acquiring a new personal residence in Winnipeg, his employer granted him a five year, interest free loan of $125,000. The loan qualifies as a home relocation loan. The loan was granted on October 1, 2017 and, at this point in time, the interest rate on open five year mortgages was 5 percent. Assume the relevant ITR 4301 rate was 2 percent on this date. Mr. Brooks purchases a house for $235,000 on October 2, 2017. He has not owned a home during any of the preceding four years.
5. Other disbursements made by Mr. Brooks include the following:
Advanced financial accounting course tuition fees - $1,200
Music history course tuition fees (University of Manitoba one week intensive course) - 600
Fees paid to financial planner - 300
Payment of premiums on life insurance - 642
Mr. Brooks' employer reimbursed him for the tuition fees for the accounting course, but not the music course.
Required: Calculate Mr. Brooks' net employment income for the taxation year ending December 31, 2017.
QUESTION 2 - The following information relates to the Fortune Five Ltd's depreciable assets.
Class 1: During 2017, a new office building was acquired at a total cost of $623,000. Of this total, it is estimated that the value of the land is $145,000. The building will be used 100 percent for non-residential activities, none of which involve manufacturing. It will be allocated to a separate Class 1.
Class 3: The January 1, 2017 balance in this Class was $798,000. During 2017, one of the warehouses in this Class burned to the ground. It had a capital cost of $150,000. Insurance proceeds totalled $185,000.
Class 8: The January 1, 2017 balance in this Class was $346,000. During 2017, the Company acquired Class 8 assets at a cost of $105,000. Class 8 assets with a capital cost of $83,000 were sold for proceeds of $75,000. None of the individual assets sold had proceeds that exceeded their individual capital cost.
Class 10: The January 1, 2017 balance in this Class was $150,000. During 2017, 3 passenger vehicles were acquired at a cost of $25,000 each. In addition, a delivery van with a capital cost of $42,000 was sold for $18,000.
Class 10.1: The January 1, 2017 balance in this Class was $17,850. The only asset in this Class was the CEO's $350,000 Bentley. At the instructions of the Company's directors, who felt this vehicle was excessively extravagant, the car was sold for $275,000 during 2017.
Class 13: The January 1, 2017 balance in this Class was $42,500, reflecting improvements that were made in 2015, the year in which the lease commenced. These improvements were made on a property leased as office space for the Company's executives. The basic lease term is for 8 years, with an option to renew for a period of 2 years. Additional improvements, costing $40,000, were made during 2017.
Class 29: The January 1, 2017 balance in this Class was $63,000. The capital cost of the assets in this Class was $252,000. As the Company has found its manufacturing operations to be unprofitable, all of these assets were sold during 2017. The proceeds totalled $51,000. None of the individual assets sold had proceeds that exceeded their individual capital cost.
Class 50: The January 1, 2017 balance in this Class was $23,000. During 2017, there were additions to this Class with a capital cost of $18,000.
Fortune Five Ltd always takes maximum CCA on each Class of depreciable assets.
Required: Calculate the maximum CCA that can be taken by Fortune Five Ltd on each class of assets for the year ending December 31, 2017 and calculate the UCC for each class of assets on January 1, 2017. In addition, determine the amount of any capital gain, CCA recapture, or terminal loss that arises. Ignore GST/HST/PST considerations.
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