Herbert Nash has owned a 200-acre parcel of land for several years. He had purchased the land for $250,000 with the intention of eventually building a home on the property. However, he received an offer of $425,000 for 75 acres of the property. Because these 75 acres had waterfront and better road access, he believed that the FMV of the remaining 125 acres was only $175,000. He accepted the offer and planned to use an A

Assignment 3: Modules 7 to 9 (100 marks; 15%)
Introduction
Assignment 3 is based on Modules 7 to 9 and should be completed at the end of Module 9. To solidify your understanding of the content of the three modules covered, be sure to complete the self-test questions set out in the modules’ activity checklists before you start the assignment.
Instructions
Read the following information and then answer the related questions. If you have difficulty completing this assignment, go back and closely review the assigned material again.

Question 2 (10 Marks)
Multi Inc., a company with a December 31 taxation year end, carries on business out of a single Class 1 building that cost $815,000. At the beginning of 2022, the UCC balance for the class was $648,275. On June 30, 2022, a tornado destroyed the building. The building was insured for its FMV of $1,000,000 and the insurance company paid that amount in September 2022. Multi Inc. replaced the building in 2023 with a used building, at a cost of $1,075,000. Multi Inc. wanted to minimize income tax to the extent possible.

Describe the 2022 and 2023 income tax consequences of these events, including the capital cost and UCC balance for the replacement building at the end of 2023. Ignore any gain or loss related to the land on which the building was situated.

 
Question 3 (25 Marks)

Each of the following independent Cases describes a situation with a proposed tax treatment.

1. Herbert Nash has owned a 200-acre parcel of land for several years. He had purchased the land for $250,000 with the intention of eventually building a home on the property. However, he received an offer of $425,000 for 75 acres of the property. Because these 75 acres had waterfront and better road access, he believed that the FMV of the remaining 125 acres was only $175,000. He accepted the offer and planned to use an ACB of $177,083
[$250,000 X $425,000/($425,000 + $175,000)] in calculating his gain or loss.

2. Gregory Hayes sold a capital property with an ACB of $85,000 for $135,000. The $135,000 price included a charge for a warranty on the property which he anticipates will cost him $5,000 to service. He did not anticipate any of the warranty expenses would be incurred in the year of the sale. He planned to recognize a capital gain on the transaction of $45,000 after the consideration of the estimated warranty costs.

3. During the current year Ms. Kristy Stone sold her sailboat to an arm’s length person for $71,000. She had purchased the boat several years ago for $51,000. Also, during the year, she sold securities with an ACB of $22,000 for $12,000. She intends to deduct the loss on the securities against the gain on the sailboat.

4. Nellie Ward had a cottage which she had owned for a number of years. Nellie Ward purchased the cottage for $125,000. It is currently worth more than $500,000. While she has rarely used it, preferring to stay in her penthouse in the city, she believed that it would continue to increase in value. Given this, she decided to convert it to a rental property. While she planned to report her future rental income to the CRA, she did not plan to recognize a capital gain on the conversion of the property, since there was no actual disposition.

5. During the current year, Ignacio Rogers sold a non-depreciable capital property for $216,000. The ACB of the property was $184,000, resulting in a capital gain of $32,000. Under the terms of the sale, he would receive 10% ($21,600) of the sale price in the year of the sale, with the remainder due in the following year. As a result, he would recognize only $3,200 of the capital gain in the year of the sale.

Required: In each of the preceding Cases, indicate whether you believe that the income tax treatment proposed is the correct one. Explain your conclusion.
 

Question 4 (25 Marks)

In each of the following independent Cases, determine the maximum amount of 2023 personal tax credits, including transfers from a spouse or dependant, that can be applied against federal income tax payable. Ignore, where relevant, the possibility of pension income splitting.

A calculation of federal income tax payable is NOT required, only the personal tax credits.

1. Sarah Partridge was 72 years old and had net income of $61,300. This total was comprised of OAS and pension income from her former employer. Her husband was 58 years old and had a net income of $4,725.

2. Martin Brody was divorced from his wife several years ago. He has custody of their four children, ages 7, 9, 12, and 15. His net income was $54,000 which consisted of spousal support payments. The children were all in good health. The oldest child had net income of $11,200 during the year. None of the other children had any income.

3. Marion Lassiter had net income of $132,450, all of which was rental income. Her husband had a net income of $1,600. They had three children, ages 14, 16, and 19. All these children were in good health and continued to live at home. The 19-year-old child had a net income of $8,460. None of the other children had any income. During the current year, Ms. Lassiter paid the following medical expenses:

Marion $ 4,240
Her Spouse 3,450
14-Year-Old Child 1,860
16-Year-Old Child 2,450
19-Year-Old Child 6,720
Total $18,720

4. Janice Archer had a net income of $92,100, none of which was employment income or income from carrying on a business. Her spouse had a net income of $7,240. Their daughter was 15 years old, lived with them, and had a net income of $2,150. Their son was 22 years old and, because of a physical infirmity, continued to live at home. He had no net income as he volunteered for a non-profit organization that provided services to disabled individuals. His disability was not severe enough to qualify for the disability tax credit.

5. Joan Baxter had a net income of $85,000, all of which was employment income. Her employer withheld maximum CPP contributions and EI premiums. She was married to John Brown whose net income was $4,230. They had three children aged 7, 9, and 11. All the children were in good health and none of them had any income.
 
Question 5 (30 Marks)
Joan Galley was a salesperson for Goodship Lollipop Ltd., a Canadian public corporation with gross revenues of $45 million. The company produced various sweets, such as candy and chocolate bars.

It was a stressful time for Joan these last 18 months. In the summer of 2022, her spouse passed away. Joan has two children: Ryan who is 13 and Julie who turned 18 on April 30, 2023.

Joan’s 2023 employment contract stated that the Company would pay Joan an annual base salary of $50,000 plus a commission of 1.5% of her annual cash sales. Her 2022 sales totaled $3,200,000, with $200,000 of this total collected by the Company in 2023. Her 2023 sales amounted to $2,800,000, but the Company had yet to collect $300,000 of these by December 31, 2023.

In 2023, the Company paid Joan her base salary plus her commission income. A review of her last pay stub for 2023 revealed the Company withheld the following from her salary for the year:

Contributions to the Company RPP $3,000
CPP Contributions 3,754
EI Premiums 1,002
Premiums for the Company’s Dental and Health Plan* 1,500
Federal Income Tax Withheld 15,000

* The plan was funded 50/50 by the employees and the employer and was a Private Health Services Plan (PHSP).

The Company’s group term life insurance covered Joan. Her coverage was equal to her annual base salary. The Company paid a premium of $5 for every $1,000 of coverage to the Sweet Life Insurance Company.

In January of 2023, Joan detected a packaging problem with a particular line of candies before the Company shipped them. Her keen eye saved the company an estimated $360,000 in product recalls. This helped her win the employee of the year reward, which was an iPad2 which cost the company $900.

In September of 2022, the Company transferred her from Montreal to Toronto. She thought the change would be beneficial. The Company paid for all her moving expenses. Unfortunately, due to the quick sale of her Montreal home, she incurred a $30,000 loss on its sale. The Company agreed to reimburse her $20,000 for the loss. The Company paid Joan the $20,000 on January 14, 2023.

In April of 2022, the Company granted her the right to purchase up to 5,000 shares of the Company for $17 per share under the employee stock option plan. At the time the Company granted the option, the shares were trading at $15. On February 1, 2023, when the shares were trading at $20 per share, she exercised her option on 3,000 shares. She sold 2,000 shares at $22 per share with a settlement date of December 30, 2023.

To purchase the 3,000 shares, Joan negotiated an interest free loan from the Company for the purchase price. The Company gave Joan the loan on February 1, 2023. Joan repaid the loan in full on December 31, 2023.

Throughout 2023 the Company provided her with an automobile, which it leases for $450 a month. The automobile was also available for her personal use. During the year, Joan drove a total of 35,000 kilometers, 8,000 of which were personal and 27,000 of which were for employment purposes. Except for $2,200 of car insurance, the Company did not pay for any of her automobile operating expenses as these were Joan’s responsibility.

Joan was responsible for her salesperson expenses (including the automobile operating expenses). During the year she incurred the following:

Total Automobile Expenses (Excluding Insurance) $5,400
Meals and Entertainment with clients (not billed to clients) 2,600
Hotels 1,500

Joan incurred all the meals and entertainment with clients while she was away for a minimum of 24 hours.

Joan was a member of the Confectioners’ Association of Canada, a professional association. Her annual membership dues were $1,400, which she personally paid.

Joan met all the conditions of ITA 8(1)(f) (deductible salesperson expenses).

Joan had a sideline business called The Cup Cake Diva which she operated as a proprietorship. She started her business venture 10 years ago and continued it in Toronto. Joan prepared and sold cupcakes and other pastries from her home. Ninety percent of her sales were made for social events which were held typically on weekends.

Joan provided you with the following information for 2023 with respect to her business:

Sales Revenues $42,000
Supplies (Flour, Sugar, Boxes, Etc.) Purchased 12,000
Purchase of New Commercial Oven
(For Business use only) 2,200
Purchase of new automobile for cash (Not zero-emission) 39,000
Automobile operating expenses 3,000

With respect to the supplies, she had an opening inventory of $1,600. On December 31, 2023, the inventory of supplies was $900.

Early in January 2023, Joan sold her old automobile for $12,000. It cost $35,000. Joan’s business used both the old and the new automobiles exclusively. Any personal use was derived by Joan using the Company provided automobile.

Joan’s daughter Julie helped with the business. She made the deliveries to practice her driving and the daughter showed real aptitude for dealing with clients. Joan did not offer her any monetary compensation as Julie was happy to be driving a new automobile at this time.

Joan used 20% of the livable space in her home (including a component for shared areas) for her business. Her 2023 household expenses include the following:

Utilities $5,400
Municipal Property Tax 3,800
Maintenance 1,600
Dedicated Phone Line for the business 800
Home Insurance 1,900
Mortgage Interest 12,300

The January 1, 2023 UCC balances were as follows:
Class 8 $3,100
Class 10.1 9,000

Joan did not claim CCA on her home as she realized that if she did, this would result in future recapture and capital gains implications.

Her son Ryan was in high school and had no income of his own.

Her daughter Julie, not knowing which university program she would like to attend, enrolled part-time (4 months) at a local college. Joan agreed to pay Julie’s tuition of $1,600 if Julie agreed to transfer any related credit to Joan. Julie’s 2023 net income was $7,200.

During the year, Joan paid $5,000 for orthodontic work (braces) for Ryan. The Company reimbursed her 50% of the amount through the company’s dental and health plan.

In 2023, Joan made $1,600 donations to registered charities.

Assume the prescribed interest rate for loan benefits during all four quarters of 2023 was 1%.

Required:
A. Determine Ms. Galley’s minimum:
1. 2023 Net Income,
2. 2023 Taxable Income,
3. 2023 Federal Income Tax Liability or Refund.
In determining these amounts, ignore immediate expensing and any GST/HST & PST considerations.