AFM 361 Spring 2008
Final Solution
Question 1: 55 marks, = 1.2 mark, max 53
(A) Calculation of taxable income(max 21)
Net income 105,000
Add:Tax expense 19,500
Charitable contribution 10,000
Depreciation 120,000
Golf membership 2,000
Taxes on U.S. dividends 500
Less:CCA on furniture and fixture 60,000 x 20% ( 12,000)
CCA on leasehold improvements 144,000 ÷ (10 + 5 ) ( 9,600)
CECA (48,500 + ¾ x 40,000 ) x 7% no half year rule ( 5,495)
Division B income 229,905
Division C Deductions:
Charitable contributions lesser of (a) contribution, 10,000
(b) 75% of 229,905 172,429 ( 10,000)
Canadian dividends ( 2,000)
Net capital loss not deducted
217,905
(B) Calculation of tax payable(max 32)
Tax 217,905 x 38% 82,804
Abatement (Schedule 1) ( 17,705)
Tax reduction 8.5% x 217,905 ( 18,522)
Non-business foreign tax credit (Schedule 2) ( 500)
Business foreign tax credit (Schedule 3) ( 7,000)
39,077
Schedule 1 (abatement)
RevenuesSalariesAvg.
Canada600 + 300 75% 120+ 30 + 112.5 87.5% 81.25%
U.S. 300 37.5
1,200 300.0
Abatement: 81.25% x 10% x 217,905 = 17,705
Schedule 2 (Non business FTC)
Lesser of (a) tax paid 500
(b) for. non-bus. inc. x tax otherwise payable1
Div. B inc – dividend dedn – NCL
3,000 x (82,804 – 17705 – 18522 )= 613
229,905 – 2,000
Schedule 3 (Business FTC)
Least of (a) tax paid 7,000
(b) for. bus. inc. x tax2
Div. B inc – dividend dedn – NCL
35,000 x (82,804– 18522 )= 9,872
229,905 – 2,000
(c) tax (*) w/o abatement – non-bus. FTC = 82,804– 18522 – 500 63,782
Question 2: 55 marks, = 1.2 mark, max 59
(A) Calculation of losses(max 20)
Non-capital Net capital Expiring
Prior year – non-capital 42,000
– net capital 11,000 11,000
Current year – a.c.l. 10,000 10,000
Property: dividend ( 1,500)
Div C ded’n 1,500
interest 2,500
2,500 2,500
Business: operations 27,000
inventory 500
CCA on cl 43 3,000 30,500
73,500 23,000 23,500
Elect on land for t.c.g. of 23,500; deemed PoD of 100,000 + 2 * 23,500 = 149,000
Net capital losses used up, therefore $0
Non-capital losses: Beginning balance 42,000
New: business loss 30,500
property loss 1,000
Dividends deduction 1,500
Net capital loss claimed 13,000
3(c) income 25,500 – 10,000 ( 15,500) 30,500
72,500
Verify that loss can be used:
continue business with reasonable expectation of profit
(B) Asset values(max 8)
Assets after acquisition
Inventory 1,500
Equipment – CC 30,000
UCC 15,000
Building – CC 250,000
UCC 235,200
Land – ACB 100,000 + 2 * 23,500 149,000
(C) Calculation of taxable income(max 31)
Net income 174,000
Add:Tax expense 31,000
Depreciation 120,000
Golf membership 2,000
Loss on sale 15,000
Less:Terminal loss on the building (Sch. 1) ( 34,200)
CCA on furniture and fixture (60,000 – 12,000) x 20% ( 9,600)
CCA on leasehold improvements 144,000 ÷ (10 + 5 ) ( 9,600)
CCA on equipment 15,000 x 30% ( 4,500)
CECA (78,500 – 5,495) x 7% ( 5,110)
Division B income 278,990
Division C Deductions:
Non capital losses (assume businesses are similar) ( 72,500)
196,490
Schedule 1 (subsection 13(21.1)
PoD on building:
Lesser of
(i) FMV land and building 350,000
minus lesser of
(A) ACB land 149,000
(B) FMV land 150,000 149,000 201,000
(ii) greater of
(A) FMV building 200,000
(B) lesser of CC 250,000
UCC 235,200 235,200 235,200
Therefore, PoD on building is 201,000,
leading to a terminal loss of 235,200 – 201,000 = 34,200
Therefore, PoD on land is 350,000 – 201,000 = 149,000
leading to an allowable capital loss of (149,000 – 149,000 ) / 2 = 0.
Question 3: 40 marks, = 1.2 mark, max 38
2007 2008
Division B income before the following 1,200,000 1,500,000
SR&ED: last year’s ITC 111,553
new computer ( 300,000) ( 50,000)
used computer ( 50,000)
new furniture ( 100,000) ( 20,000)
salaries ( 200,000) ( 450,000)
operating costs ( 30,000) ( 100,000)
CCA:building 1.5M x 6% x ½ ( 45,000) ( 87,300)
CECA:209,250 x 7% ( 14,648)
inclusion * 125,148
Non-capital loss carry-forward ( 10,000)
Taxable income 450,352 1,029,401
Tax @ 38% 171,134 391,172
Abatement @10% ( 45,035) ( 102,940)
Tax reduction @8.5% (technically 7% in 2007) ( 38,280) ( 87,499)
111,553 200,733
ITCmax: 20% x (300 + 100 + 200 + 30) = 126,000
limited to tax payable ( 111,553)
max: 20% x (50 + 20 + 450 + 100) ( 124,000)
carryforward: 126,000 – 111,553 ( 14,447)
0 62,286
* Lesser of(a) negative amount: opening balance 209,250
2007 CECA ( 14,648)
2008 disposal ¾ x 500,000 ( 375,000)
180,398
(b) total CECA350,000 + 14,648 + 15,750 380,398
less previous recaptured ( 350,000)
30,398 30,398
Plus: 2/3 x (180,398 – 30,398 ) 100,000
130,398