Tax Opinion
Henry is 60 years old. He is divorced from Martha, the mother of two of his children. Martha is a very successful CEO of a large global frinancial institution and travels extensively with her work. As a result, the children live with Henry and Henry's common-law partner, Alice.
There are three children:
- Robyn is nine years old. She was adopted by Henry and Alice in 2017.
- Robert is fifteen years old, and is a para-palegic as a result of an injury he sustained in a car accident at age twelve. He was born to Henry and Martha. His doctor has signed a T2201.
- Ronald is twenty years old and is dependant on Henry as a result of a mental disability. He was born to Henry and Martha. His doctor has signed a T2201.
Since Henry has custody of the children, he also receives child and spousal support payments from his ex-wife, Martha. In accordance with their written agreement, Martha makes monthly payments of $15,000 to Henry. Of this monthly amount, $5,000 is designated as spousal support, and the remainder is child support. During the year Martha made all of the necessary payments except one, which she missed because she was travelling in Europe on business. In addition, Martha was given a Golden Globe award by her employer in 2017, and she received a large bonus. She gave Henry an extra lump sum payment of $50,000 to celebrate the award. She acknowledged that she still owed Henry one missed monthly payment for 2017, and she made that payment in January, 2018.
Henry is an architect and has been operating an unicorporated business in London, Ontario where he has been designing luxury homes and office buildings for wealthy clients. All of Henry's business records are maintained on a cash basis. For 2017, the business had a net cash flow from operations of $59,300. Henry has elected under ITA 34 with respect to his work in process. Relevant balances for conversion to the accrual basis are as follows:
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January 1 balance
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December 31 balance
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Billed accounts receivable
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$39,000
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$12,000
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Unbilled work in process
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$47,000
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$ 8,000
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Accounts payable
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$12,000
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$25,000
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On January 1, 2017, Henry's company had the following capital assets.
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Date of Purchase
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Capital Cost
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UCC
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Building (Class 1)
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January 1, 2014
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$250,000
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$215,000
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Land (where building is located)
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January 1, 2014
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$100,000
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$100,000
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Furniture and fixtures
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January 1, 2014
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$85,000
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$68,600
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In addition, Henry owns a Cadiliac SRX which he uses strictly for personal purposes. The Cadilliac was purchased for $65,000 on January 1, 2016. Henry plans to use it for the next ten years. On January 28, 2017, Henry purchased a Lexus 150 for $53,000. The Lexus is used exclusively for business purposes.
During 2017, Henry decided to realize a life-long dream and relocate his business to Montreal. He flew to Montreal in April, 2017 to look for a home. On returning to London, Henry learned that his offer to purchase a home in Montreal had been accepted. Henry and Alice, along with the three children, moved in June, 2017. Henry decided to take a short break from his business to help the children get established, and opened his new architecture business in Montreal in October, 2017. Although he began meeting with potential customers at this time, he did not have any actual sales until early in 2018.
As a result of the move, Henry sold the London building in which his practice had operated for $452,000. Of this amount, $120,000 relates to the land. The furniture and fixtures were sold for $75,000. Henry acquired a new building in Montreal in October, 2017, for $425,000, of which $150,000 relates to the land. New furniture and fixtures were acquired in December, 2017 for $65,000. Henry has always deducted the maximum CCA to which he is entitled, even if it creates a loss for the current year. He wishes to continue to follow this practice.
Prior to opening his architecture business in 2014, Henry had worked for a large public company in the graphic design department. During the time of his employment, he received options to purchase 9,000 shares of the Company's stock for $16 per share. The shares were trading at $14 at the time the options were granted. The grant agreement allowed Henry to exercise the options up to December 31, 2020, even if he left the company prior to that time.
On July 1, 2017, Henry exercised all of the options from his former employer. On that day, the shares were trading for $25.50 per share. To assist with costs assosciated with reestablishing his business in Montreal, Henry sold these shares for $27 per share on December 15, 2017. The commission on the sale was $500. In addition, Henry sold a painting that he had previously purchased for $500. The proceeds from this sale were $2,500.
When Henry moved to Montreal, he sold his London home for $435,000. He had originally purchased the home for $265,000. He also decided to sell his cottage in Gravenhurst, Ontario for $359,000. The cottage had an original cost of $86,000. Both properties had been purchased in 2005. For each of these property sales, Henry paid a sales commission of 4.5% of the selling price.
Henry believes it should be possible to deduct the sales commission and legal fees on the house as moving expenses, and on the cottage as selling costs. A summary of the legal costs of selling these two properties is provided below:
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Legal fees on sale of cottage
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$ 750
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Legal fees on sale of home in London
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850
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Legal fees to acquire the home in Montreal
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965
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Other moving expenses included:
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Payments for moving and storage of household items
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$ 8,500
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Cost of Montreal trip to choose new home
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2,500
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Hotel, food and gasoline on drive to Montreal (3 days)
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1,950
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Hotel and food costs while waiting for completion of new home in Montreal (20 days)
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7,500
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The drive to Montreal was 700 kilometers and included hotel costs of $600, meal costs of $900, and gas costs of $450. Henry kept detailed receipts for all meals and hotels. He did not keep receipts for gas.
Henry also kept detailed receipts for all costs of meals and hotels during the time in Montreal while waiting for the completion of the new home. The Montreal hotel had a total cost of $3,500.
Henry received the following other sources of income during 2017:
Eligible dividends $2,000
Non-eligible dividends $1,000
Foreign dividend (before 17% tax withheld) $1,500
At the beginning of 2017, Henry owned 2 residential rental properties in London, both acquired in 2007. On January 1, 2017 the UCC of property A was $156,000. The cost of this property was $255,000. Property B had a cost of $356,000 and UCC of $276,000 on January 1, 2017. On June 1, 2017, Property A was sold for $261,000. On that same date, a new property was acquired for $247,00. During 2017, Henry received rent of $42,000 and had rental expenses other than CCA of $32,500. All three rental properties are in a condominium building on leased land. Henry did not dispose of these properties when he moved to Montreal.
Henry has a net capital loss carry forward from 1989 of $2,000 ($4,000 x 50%), and a listed personal property loss carryforward from 2015 of $3,000 ($6,000 x 50%).
Alice is 67 years old and has employment income of $150,000, on which she paid no CPP or EI since she is over the age of 65. Her employer allows her to work from home, so the move to Montreal did not affect her job. $30,000 of the salary from her job was earned while the couple lived in London. Alice has a joint bank account with Henry. The funds in the account are contributed and used by both. During 2017, the service charge on this account was $200, and the interest earned was $150. Also during 2017, Alice sold 250 shares in H Ltd, a Canadian public corporation, for $20 per share. Her trading history in these shares is as follows:
May 24, 1992 - purchased 130 shares @ $26/share
June 30, 1994 - purchased 170 shares @ $31/share
Aug 20, 1994 - received 5% stock dividend when shares were worth $15
Oct 31, 1999 - purchased 300 shares @ $29/share
June 9, 2005 - sold 400 shares for $15/share
July 4, 2005 - purchased 500 shares for $12/share
June 3, 2015 - purchased 385 shares @ $18/share
In 2014, Alice had invested in a bond with a maturity value of $50,000 and a maturity date of September 30, 2020. The bond has a stated interest rate of 6%, which is equal to the market rate. The bond calls for the first three and one-half years of interest to be paid on December 31, 2017.
Henry's oldest son, Ronald, has some personal income from his summer and part time jobs. During 2017, he earned $13,000 from these sources, and paid CPP of $644 and EI of $212. Ronald is a part time university student, due to his disability. In 2017, he paid tuition fees of $6,500.
In 2016, Henry contributed $4,300 to a spousal RRSP for Alice. Alice had not previously contributed to an RRSP. In August 2017, Alice withdrew $1,000 from the RRSP and used the funds for a week-end trip to Niagara-on-the-Lake. On February 10, 2018, Henry contributed an additional $8,000 to the spousal RRSP.
At the beginning of 2017, Henry had undeducted RRSP contributions carried forward from 2016 of $2,200. His 2016 Earned Income was $161,500. Henry wishes to deduct the maximum allowable amount of RRSP contributions this year. His deduction room at the beginning of 2017 was $15,000.
During 2017, Robyn's adoption by Henry and Alice was finalized. Costs incurred during the adoption period included fees paid to the Provincial adoption agency of $8,000; legal fees of $6,500; travel expenses to bring Robyn from Moosejaw, Saskatchewan $3,000; and new clothing and furniture for Robyn of $7,000.
During 2017 Robyn received non-eligible dividends of $15,000 from a private Canadian corporation controlled by Henry. In addition, Robyn had employment income of $18,100 from her modeling contracts. Due to her age, no CPP or EI was deducted from her employment income. Henry and Alice paid $6,000 for before and after school care for Robyn during 2017.
REQUIRED:
Compute Net Income, Taxable Income and Net Federal Tax Payable for 2017 for Henry and for Alice. Also compute Net Income, Taxable Income, and Net Federal Tax Payable for 2017 for any of the children that may be required to file a tax return. If anyone is not required to file, clearly state why they are not reuired to do so. Show all your calculations. Prepare brief notes explaining any items that are listed above, but which you did not use in your calculations.
Henry wishes to use all elections available to him to minimize any tax consequences of his various transactions.