Deck 10: Individuals: Determination of Taxable Income and Taxes Payable

Question 1

Stuart Planter is a full-time teacher,and he lives in the country with his family.Stuart farms on a part-time basis.Stuart earned $85,000 in 20x6 at his full-time teaching job.During 20x6 he also incurred farm expenses totaling $12,000 and farm revenues totaling $8,000.
Stuart has asked you to help him prepare his 20x6 tax return,and provides you with the following additional information:
• Net capital losses from 20x5 totaled $10,000,and non-capital losses from 20x5 totaled $2,000.
• Stuart had the following amounts deducted from his pay during the year: CPP and EI of $3,452; and income tax of $19,000.
• Stuart contributed $5,000 to his TFSA,and $15,000 to a guaranteed investment certificate (GIC)which pays 4% annual interest.His first interest receipt for the GIC will be on June 30^th of 20x7.
• Stuart received a $1,000 non-eligible dividend in 20x6.
• Stuart's wife works full-time and earns $68,000 a year.
• Stuart had extensive dental work done in 20x6.The total cost was $7,500 and Stuart did not receive any reimbursement for the cost.
Required:

A)Using tax rates and amounts applicable for 2018,calculate the following:
1.Calculate Stuart's net income for tax purposes for 20x6 in accordance with Section 3 of the Income Tax Act.
2.Calculate Stuart's taxable income for 20x6.
3.Calculate Stuart's minimum federal tax liability for 20x6.(Round all numbers to zero decimal places.)
B)Explain why any items have been omitted.

Answer 1

A)
B)Items omitted:
Net-capital loss: Stuart did not incur a capital gain during the year,so cannot apply this loss.
Property income: The interest on the TFSA is non-taxable,and the interest on the GIC may be reported as property income in 20x7 (the first anniversary of the investment).
Income tax deducted from employer: This amount will be entered on Stuart's T1,after NITP,taxable income,and his tax liability.The difference between Stuart's total tax liability (federal and provincial)and the amount deducted by his employer will result in a balance owing or a refund.
Stuart's wife's income: His wife will file her own tax return and due to her income level,Stuart cannot claim the spousal non-refundable tax credit.

Question 2

ABC.Ltd.had an unused allowable capital loss of $20,000 during the current fiscal year and an unused business loss of $10,000.ABC Ltd.has a December 31 year-end.Which of the following statements is TRUE?

A)All of the losses will be lost if not used in this fiscal year.
B)The unused allowable capital loss will become a net-capital loss and can be carried back three years and forward indefinitely, and the unused business loss will become a non-capital loss and can be carried back three years and forward twenty years.
C)The unused business loss will become a net-capital loss and can be carried back three years and forward indefinitely, and the unused allowable capital loss will become a non-capital loss and can be carried back three years and forward twenty years.
D)The unused business loss will become a non-capital loss and can be carried back three years and forward indefinitely.

Answer 2

B

Question 3

Sally earned $210,000 during 20x8.CPP and EI were deducted from her pay,totaling $3,452,and total income tax (federal and provincial)deducted was $70,000.She also received eligible dividends in the amount of $10,000.She sold shares in a public corporation during the year and recognized a capital gain of $500,000.Sally is married.Her husband earned $100,000 during the year.
Required:

A)Calculate Sally's taxable income and her federal tax liability before the deduction of any allowable non-refundable tax credits using 1)the normal method,and 2)the alternative minimum tax method.
B)Which method would allow for a deduction of the dividend tax credit?
C)Which method will Sally be required to use in 20x8,and why? How much is her federal tax liability? (Use tax rates and amounts applicable for 2018.)

Answer 3

A-1)Federal tax liability (before non-refundable tax credits)
Normal:

A-2)AMT (before non-refundable tax credits):
$580,000 * 15% = $87,000
B)The dividend tax credit is only deductible under the normal method.
C)Sally will be liable for taxes under the normal method,as the net federal tax is higher.
Federal tax: $136,096
Less:
Basic personal credit: (1,771)
CPP/EI (518)
Employment credit: ( 179)
Dividend tax credit: (2,073)[6/11 F* 38% *10,000]
Federal tax: $131,555
[Compared to $87,000 - 1,771 - 518 - 179 = $84,532 using the AMT method]

Question 4

Which of the following is FALSE with respect to the final tax returns of deceased taxpayers?

A)Unused net capital losses less any capital gains deductions previously claimed are deductible against any income.
B)Non-refundable tax credits are prorated to the date of death on the final tax return.
C)A Rights or Things return may be filed in addition to the final tax return.
D)Of the tax returns available for a deceased taxpayer, only the final tax return must be filed.

Question 5

Samantha received an eligible dividend in the amount of $2,000.She is in a 50% tax bracket for regular income.How much is Samantha's dividend tax credit? (Assume a dividend tax credit rate of 15%.)

A)$300
B)$414
C)$1,000
D)$2,760

Question 6

Which of the following is an accurate list of some of the personal federal non-refundable tax credits available to reduce the federal tax liability?

A)Canada caregiver for adult relatives credit, Canada employment credit, medical expense credit, disability (mental or physical impairment) credit
B)Dividend tax credit, non-capital loss credit, donation credit, age credit
C)Tuition credit, adoption expense credit, farm credit, pension credit
D)Pension credit, volunteer firefighter credit, stock option credit, donation credit

Question 7

Which of the following accurately describes a requirement for a business to qualify as a 'qualified small business corporation' (QSBC)?

A)The corporation must be a CCPC that uses at least 50% of the fair market value its assets for active business purposes in Canada at the time the shares are sold.
B)More than fifty percent of the fair market value of the assets of the business must have been used for active business in the past 36 months.
C)The corporation must hire less than 5 full-time employees.
D)The shares must not have been owned by another non-related individual in the past 24 months.

Question 8

Susan White incurred the following income,disbursements,and losses in 2018 and 2019:
Additional information:
2017 was the first year that Susan sold a capital asset.
Susan incurred a business loss of $5,000 from her proprietorship in 2017 (the first year of the business)that was not needed to reduce her net income for tax purposes in 2017.
She has never used her lifetime capital gains deduction.
Required:
Calculate Susan's minimum taxable income for 2018 and 2019,in accordance with Section 3 of the Income Tax Act.(Use the appropriate dividend rates for 2018 and 2019.)

Question 9

Archie Smith works full-time as a dentist and is in a 50% tax bracket.He lives on an acreage where he began a part-time farming operation last year (20x1).During 20x1,Archie incurred farm expenses totaling $38,500 and he received $5,200 in farming revenue.Operations became more profitable this year,and in 20x2 Archie's farm revenues were $20,000 and expenses totaled $16,000.
Required:
a)Name the type of loss that Archie was able to recognize in 20x1? Briefly explain your answer.
b)Calculate the loss from farming operations that Archie was able to apply against his other sources of income in 20x1.
c)What effect will the 20x1 operations have on Archie's 20x2 and future year's taxable income? Show your calculations.

Question 10

Theodore is 37 years old.He earned $97,000 in 2018 at his job as a financial analyst.His CPP and EI contributions totaled $3,452.In 2018 he enrolled in part-time studies at his local university.His tuition fees totaled $1,500.Theodore donated $2,000 to Ducks Unlimited (a registered charity for tax purposes),and $800 to a federal political party.He also spent a total of $4,500 on eyeglasses,dental care,and prescriptions in 2018,none of which was reimbursed.Theodore's wife did not work during 2018 while she was enrolled in university as a nursing student.She had no other income and her taxable income was $0.Her tuition fees were $8,000.She always transfers as much of her tuition to Theodore as possible.Theodore has a $2,000 non-capital loss from 2017.Theodore and his wife do not have any children.
Required:
A.Calculate Theodore's taxable income for 2018.
B.Calculate Theodore's federal tax liability for 2018.
(Use rates and rules applicable to 2018.)