Question 1
Betty Booth has established herself as a very effective sales representative for products related to health care services. While she has worked independently for a number of years, she has received two very attractive offers of employment. Both of these offers would require that she begin work on January 2, 2021.
Offer One
This offer would provide her with a fixed salary of $ 225,000 per year with no commissions on her sales. The employer would provide an allowance of $ 30,000 per year to cover hotel, meals, and airline costs. The employer believes that the CRA will consider this allowance to be reasonable in the circumstances. With respect to advertising and promotion expenses, no allowance or reimbursement would be provided.
This employer would provide her with an automobile which would be leased at a cost of
$ 850 per month, including a $ 75 per month payment for insurance. The employer will pay all of the operating costs of the automobile.
This employer would provide her with a $ 200,000 interest free loan in order to facilitate her investment activities. The loan will have to be repaid after five years.
Offer Two
This offer would provide her with a fixed salary of $ 175,000 per year, plus a commission on all of her sales. Ms. Booth estimates that for 2021, these commissions will total
$ 85,000. The employer would reimburse her hotel, meal, and airline costs. With respect to advertising and promotion expenses, no allowance or reimbursement would be provided.
While this employer will not provide her with an automobile, the business will provide her with an allowance for using her own automobile of $ 1,500 per month. Ms. Booth estimates that for 2021 the total costs associated with driving her own vehicle will be as follows:
Operating Costs $ 10,600
Capital Cost Allowance (Tax Depreciation) (100%) 4,500
Financing Costs 1,800
Total $ 16,900
Other Information
The following information is applicable to either of the alternative offers.
1. She estimates that her employment related expenses during 2021 would be as follows:
Travel Costs (Hotel and Airline Costs) $ 18,000
Travel Costs (Meals) 8,500
Advertising and Promotion 23,000
2. Whether it is the employer’s automobile or her own personal vehicle, she would use the car throughout 2021. She expects to drive this vehicle a total of 53,000 kilometers during 2021, with 37,000 of these kilometers required by her employment activities.
3. Both offers include a group disability insurance plan for which the company will pay all of the premiums. The plan provides periodic benefits that compensate for lost employment income. This will cost the employer $ 4,500 per year.
4. Both offers include a $1,000,000 face value life insurance policy. All of the premiums, which will total $ 3,800 per year, will be paid by the employer.
5. Assume that the prescribed rate is 2 percent throughout 2021.
Required:
Based on the estimates made by Ms. Booth, calculate Ms. Booth’s minimum 2021 net employment income for each of the two offers. Ignore PST and GST considerations.
Question 2
Computer Wizards Ltd. has determined that its Net Income for Tax Purposes, before any CCA deductions, was $ 80,000, for the taxation year ending December 31, 2020. As Computer Wizards Ltd. does not have any Division C deductions, Taxable Income before any deductions for CCA would also amount to $ 80,000.
On January 1, 2020, Computer Wizards Ltd. had the following UCC balances:
Class 1 (Two Buildings) $ 700,000
Class 8 210,000
Class 10 140,000
Class 10.1 (BMW – Cost $ 195,000) 20,000
Class 10.1 (Mercedes – Cost $ 240,000) 40,000
Class 12 50,000
Class 13* 94,500
Class14.1 (Pre January 01, 2017 Acquisition) 195,300
* This balance reflects leasehold improvements made on January 1, 2018 at a total cost of $ 126,000. The original term of the lease was 4 years. However, there are two available renewal options, each allowing Computer Wizards Ltd. to renew for a period of two years.
During 2020, the cost of additions to Class 8 amount to $ 90,000, while the proceeds from dispositions in this class totaled $ 40,000. In no case did the proceeds of disposition exceed the capital cost of the assets retired, and there were still assets in the class as of December 31, 2020.
During 2020, the cost of additions to Class 10 amounted to $ 70,000, while the proceeds from dispositions in this class totalled $ 50,000. In no case did the proceeds of disposition exceed the capital cost of the assets disposed of, and there were still assets in the class as of December 31, 2020.
The company plans to sell the BMW in January, 2021, and expects to receive about
$ 105,000.
All of the Class 12 assets were acquired in 2019.
There were no acquisitions or dispositions in either Class 1 or Class 12 during 2020.
Computer Wizards Ltd. has received an unsolicited offer to purchase one of its buildings which it is considering.
During the preceding 4 years, Computer Wizards Ltd. reported the following Taxable Income:
$ 20,000 re 2019
$ Nil re 2018
$ 30,000 re 2017
$ 75,000 re 2016
Required:
A. Calculate the maximum CCA that could be taken by Computer Wizards Ltd. for the taxation year ending December 31, 2020. Your answer should include the maximum that can be deducted for each CCA class.
B. As Computer Wizards Ltd.’s tax advisor, indicate how much CCA you would advise the company to take for the 2020 taxation year, and the specific classes from which it should be deducted. Provide a brief explanation of the reasons for your recommendations. In determining your solution, ignore the possibility that 2020 losses can be carried forward to subsequent taxation years.
Question 1
Creator Ltd. has a December 31 year-end. As of January 1, 2020, Creator Ltd. had the following UCC balances for its various tangible assets:
Class 8 220,000
Class 10 120,000
Other information relating to Creator Ltd.’s tangible assets is as follows:
The January 1, 2020 UCC balance in Class 01 reflected a single building that was acquired in 2016 for $ 940,000. Of that total, $ 240,000 was allocated to the land on which the building was situated. It was a new building used 50% for manufacturing and processing and 50% for office space. It was allocated to a separate Class 01. On November 13, 2020, the building and land were sold for $ 1,100,000. At the time of sale, the land was valued at $ 560,000.
A new building was purchased on December 13, 2020 at a cost of $ 880,000, with an amount of $ 140,000 of that total being allocated to the land on which the building was situated. The new building is used 50% for manufacturing and processing and 50% for office space. It is allocated to a separate Class 01.
On March 04, 2020, Creator Ltd. acquired office furniture for $ 90,000. As a result of trading in furniture, Creator Ltd. received a trade in allowance of $ 40,000, resulting in a net cost for the new furniture of $ 50,000. The capital cost of the furniture that was traded in was $ 55,000.
The January 1, 2020 balance in Class 10 reflects nine vehicles that were being used by Creator Ltd.’s sales staff. Their original cost totaled $ 380,000. Creator Ltd. decided it would be more economical to provide their sales staff with leased vehicles. To this end, the nine vehicles were sold for proceeds of $ 140,000 on September 09, 2020. The amount received for each vehicle was less than its capital cost.
On April 10, 2020, Creator Ltd. acquired a Mercedes, which was used solely by the company’s president. The cost of this vehicle was $ 290,000. The president drove it in 2020: 70,000 kilometres driven, of which only 10,000 kilometres involved employment duties. The president is not a shareholder of Creator Ltd.
Some of Creator Ltd.’s business is conducted out of a building that is leased. The lease, which had an initial term of 6 years, can be renewed for 2 additional years at the end of the initial term. Immediately after the lease was signed on January 1, 2018, Creator Ltd. spent $ 280,000 on leasehold improvements. During July, 2020, an additional $ 240,000 was spent upgrading this property.
During 2016, Creator Ltd. purchased a franchise. The franchise was purchased on August 1, 2016, cost $ 62,000, and had a legally limited life of 8 years.
Creator Ltd. took maximum CCA deductions in all years.
Required:
Calculate Creator Ltd.’s maximum CCA for the year ending December 31, 2020. Your answer should include the maximum that can be deducted for each CCA class. In addition, indicate the amount of any recapture, terminal loss, or taxable capital gain that results from the 2020 dispositions.
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