several tax issues for the 2019 taxation year

 several tax issues for the 2019 taxation year

QUESTION 1 

It is late March 2020. You have just met with your client Arham about his taxes. Arham has several tax issues for the 2019 taxation year that he needs your help with.

 1. Arham had two employers during 2019.

 Employer 1       Employer 2   

Employment income $59,281 $65,000 CPP deducted 2,749 2,749 EI deducted 860 860 Income tax deducted 12,000 12,500

2. Arham had the following additional sources of income:

• non-eligible dividend — $5,000

• capital gain on sale of shares in a public company — $5,500 

3. Arham is a single parent to his daughter Zarish, who is 16. Arham’s mother, Zahara, is 67 years old. She lives with Arham and Zarish and is physically infirm as well as financially dependent on Arham. Her only income is $7,200 per year from Old Age Security.

4. The family incurred the following medical expenses during the year, all of which were paid for by Arham. There are no receipts from the prior period. 

Prescription glasses for Arham $ 550

Hair implants for Arham 1,200

 Various prescription drugs for Zarish 200

 Hearing aids for Zahara 4,000 

5. From 2017, Arham has a net capital loss carryover of $4,000 and a non-capital loss carryover of $15,000. 

6. Arham owned 5,000 shares in Applesoft Computers Inc., a public company, with an adjusted cost base of $200,000. In order to save tax on the annual eligible dividend, he transferred these shares to Zarish as a gift when they were worth $250,000, on December 20, 2018. Zarish received a $15,000 dividend from the shares on December 15, 2019. On December 30, 2019, Zarish sold the shares for proceeds of $260,000 and invested the funds in a guaranteed investment certificate earning interest at 2.5%.

 7. Arham made a $3,000 donation to a registered charity in 2019. 

Required: 

a) Calculate net income for tax purposes and taxable income for Arham for 2019. (5 marks)

 b) Note any loss carryover amounts that Arham may be able to use in years prior to 2019 or in future years, along with any restrictions on the use of the loss and the year of expiry, if any. (1.5 marks) 

c) Determine the 2019 net income for tax purposes and taxable income for Zarish. Briefly discuss the tax consequences regarding the Applesoft shares for Arham and Zarish in both 2018 and 2019. (3 marks) 

d) Determine the 2019 federal Part I tax payable for Arham, taking advantage of all tax credits or reductions. Explain any amounts that are excluded from the calculation. Show full calculations including amounts where the result is nil. Calculate any refund or tax owing that would occur for Arham. Ignore provincial taxes. (15.5 marks)

 Note: Round all amounts to the nearest dollar and ignore GST and provincial taxes. Show the full detail of all steps in your calculations, even if the result is zero. 

QUESTION 2 

 Rehan Inc. is a CCPC. The accountant has correctly determined net income for tax purposes to be $652,000 for the year ended December 31, 2019. The following additional information is available:

Non-capital loss carryforward $40,000

 Eligible portfolio dividends 25,000

 Interest income (Canadian) on long-term investments 10,000 

Accounting gain on disposal of assets 65,000

Taxable capital gain on disposal of assets —

Non-eligible refundable dividend tax on hand (NERDTOH) balance, end of preceding year 2,50

Eligible refundable dividend tax on hand (ERDTOH) balance, end of preceding year — 

Prior-year dividend refund from non-eligible dividend payment 2,000

 Dividend from wholly owned subsidiary 50,000

 Dividend refund received by the wholly owned subsidiary from its NERDTOH account 4,000 

Share of annual business limit used by wholly owned subsidiary 200,000

 Non-eligible dividend paid to shareholders during year 60,000 

Required: For the 2019 taxation year: 

a) Determine the taxable income for Rehan. (1.5 marks)

 b) Determine the active business income for Rehan. (1.5 marks) 

c) Determine the aggregate investment income for Rehan. (1 mark) 

d) Determine the adjusted aggregate investment income for Rehan. Will this have any effect on the small business deduction calculation in 2020? (2.5 marks)

 e) Calculate Part I federal tax payable for Rehan. (6 marks)

 f) Calculate Part IV tax payable for Rehan. (1 mark) 

g) Calculate the refundable portion of Part I tax, the balance in NERDTOH, the balance in ERDTOH, and the eligible, non-eligible, and total dividend refund for Rehan. (10 marks)

 h) Summarize the total taxes payable by Rehan. (1.5 marks) 

Note: Round all amounts to the nearest dollar and ignore GST and provincial taxes. Show the full detail of all steps in your calculations, even if the result is zero.