required to prepare comprehensive

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COMPREHENSIVE TAX RETURN PREPARATION CASE STUDY – 2017
As a final case study covering all the rules learned in this course, you are
required to prepare comprehensive personal income tax returns using a tax
preparation software. The facts you must use for this case study are given
below. The completed tax returns must be submitted no later than the week
before the end of the course (week 13) – see due date indicated on the Course
Schedule/Calendar. I strongly recommend you work on the tax returns
throughout the course, as we progress through each module, and not wait until
the case study is due. In particular, it may take several days (even over a week
in some cases) to obtain permission to download the free tax software that is
available with this course (see below) so plan ahead.
The publisher of the textbook for this course has made arrangements with a tax
software company called Intuit Canada to have a tax return software called
“Profile” made available free of charge to students of this course. The process to
download a free student copy of the Profile software requires that you register
with Intuit Canada. This process is explained in detail in a separate message I
posted in the Comprehensive Tax Return Case Study forum on the Discussion
Board. It is also explained on the Student Companion Website under the “Profile
Access” tab.
REQUIRED:
Using a tax preparation software – preferably the Profile software that is provided
free of charge by Intuit Canada to students of this course – and the facts given
below, complete the tax return (T1) for Mr. James Doode and his common-law
partner, Susan Bond, for the 2017 taxation year, including all relevant schedules,
forms and worksheets, e.g. Form T2125 must be used for the calculation of
business income, etc. Ignore any GST or HST aspects. You must submit the
completed tax returns for both James and Susan through the Case Study page
on the Blackboard portal by attaching the file containing the data for both tax
returns if you used the Profile tax software (both files with a .17T extension) – do
not attach the program file for the Profile software (file called “profile.exe”) as that
file does not contain the data for the tax returns you prepared. NOTE: no marks
will be given for submitting the Profile program file alone.
You can use another tax preparation software than the Profile software provided
with this course. The purpose of this exercise is to work with a tax software – it
doesn’t matter which one you use. If you do use another software, please note
that I will not be able to access the data files created by that software as I only
have access to the Profile software. In that case, you will have to submit a pdf
copy of the completed tax returns with all relevant schedules, forms and
worksheets. If I cannot access the tax returns, I cannot grade them and no
marks can be given for your work.
I have posted hints on the forum called “Comprehensive Tax Return Case Study”
on the Discussion Board to help you with this assignment.
INFORMATION TO USE FOR THE TAX RETURN CASE STUDY:
James Doode is a die-hard biker who decided to start his own personal business
on January 1, 2016 after retiring from the Canadian Armed Forces. Upon
retirement in 2015, James elected to receive immediate periodic pension
payments from his employer’s registered pension plan. James’ business consists
of a motorcycle shop known as James’ Specialty Bike Shop, selling and repairing
motorcycles (industry code 441220). James proudly specializes in customizing
specialty motorcycles such as exotic choppers to very exclusive clients. All profits
from the business are reinvested in the business at this time.
James hired you to help him prepare his personal tax return for the year 2017, as
well as for his common-law partner, Susan Bond. James and Susan want to pay
the very least tax possible. They will make any election or choice legally available
to them to achieve that objective. Below is the information they believe is relevant
for the preparation of their tax returns for the current year.
Financial Statements for James’ business: attached is a copy of the internal
financial statements for James’ business prepared for accounting purposes. The
amounts shown have been determined using financial accounting principles only
and are not adjusted for tax purposes. James expects you to identify which
items need to be adjusted to bring those accounting figures in line with the
applicable income tax rules in order to comply with the tax laws in Canada.
Other Information:
James was born on November 1, 1967. He is divorced but currently lives with
Susan Bond, his common-law partner, at 123 Main Street, Anytown, Ontario,
K0H 1H0. Both have been living together for several years now. James’ Social
Insurance Number (SIN) is 527-000-145.
Susan’s SIN is 130-692-544. She was born on December 2, 1967 and has been
blind since birth but still manages to be involved in the business with James by
doing the bookkeeping. Susan’s only source of income is the salary she earns
working as a bookkeeper at James’ Specialty Bike Shop (see Note 10 to the
financial statements below) and her share of other income with James (see
further information below).
During 2017, James received bi-weekly pension payments from his former
employer’s registered pension plan for a total of $65,000 for the year. Federal
income tax of $10,000 was withheld at source on those payments. A T4A slip
from the Canadian Armed Forces’ pension plan was sent to James confirming
the above pension income in box 16 and the above tax withheld in box 22.
James still has spousal support obligations from his previous marriage. He is
required to pay $1,000 per month to his former spouse (Mary Doode; SIN: 527-
000-129) in accordance with a court order. During the year 2017, James was
only able to pay 5 months worth of support. James and Susan have no children
but James’ older brother Rick lives with them on a permanent basis since 2013
as he cannot live on his own due to a permanent mental disability. Rick was born
on June 10, 1963 and has $9,000 of social assistance income for 2017 under the
Ontario Disability Support Program. His SIN is 527-000-947. Forms T2201 have
already been filed with CRA in previous years for both Susan and Rick and their
condition has not changed since.
During 2017, James received $15,000 of eligible dividends on shares of the
Great Bank of Canada he owns. A T5 slip from the bank confirming the dividend
received (box 24) for 2017 was sent to James. No income tax was withheld on
that dividend. James and Susan also earned interest income for a total of $8,000
during 2017 from a joint investment account (each being allocated 50% of the
total interest). A T5 slip was sent by the bank indicating the total interest income
in box 13 and both names as joint owners. No income tax was withheld on that
income either. During the year 2017, James and Susan met with a financial
planner to obtain investment advice on how to maximize their investment income.
Fees of $3,500 were paid by James in 2017 to the financial planner. Following
the advice obtained, James decided to sell half the shares he held in the Great
Bank of Canada. James owned 3,000 common shares of the Great Bank he had
acquired over the last 10 years with an average cost of $30.00 per share. Half of
those shares, i.e. 1,500 shares, were sold on June 1, 2017 at a price of $63.00
per share, on which a 1% commission was paid.
Rental Activities
One of James neighbours made several complaints about the noise coming from
his shop. To resolve the conflict, James and Susan decided to acquire the
neighbour’s home jointly and rent it out. The home was acquired on July 1, 2017
and immediately leased for a 2-year period to a new tenant with occupancy as of
August 1, 2017. The following information relates to the rental home for 2017,
which is shared equally between James and Susan (50% each):
Address: 121 Main Street, Anytown, ON (co-owned by James and Susan
equally, 50% each)
Cost of home purchased: $275,000 of which $55,000 was allocated to the land.
Cost of additions made to the building in 2017 (built a new garage): $80,000.
Revenues
Gross Rents (August to December)$20,000
Expenses
Property taxes $2,000
Insurance 900
Interest on mortgage 6,025
Mortgage principal 1,525
Regular maintenance & repairs 3,500
In order to finance part of the purchase price for the rental property, James and
Susan decided to sell their personal cottage that they also jointly owned (50%
each) in AnyLake, ON, located at 123 Beach Lane. They had purchased the
cottage back in 2007 at a cost of $125,000. They sold the cottage to a friend on
June 15, 2017 for $200,000 cash. All transaction costs were borne by the
purchaser. James and Susan do not want to designate the cottage as their
principal residence because they feel their current home has a much greater
accrued gain and want to preserve the principal residence tax exemption for that
property instead.
James enrolled in a highly specialized mechanics course with his local college.
This is a 2-year program that James takes part-time to keep up with the work in
his shop. James paid tuition fees of $8,500, as per the form T2202A sent by the
college for the courses he took during 2017. Also, according to that form, James
was in part-time studies for six months during the year 2017. James wants to
claim the maximum credit he can this year and carry over any unused balance.
James contributed $15,000 into his own RRSP on September 1, 2017. James
wants to deduct the maximum amount of his contributions this year. His unused
RRSP Deduction Room at the end of 2016 was $18,500 and his Earned Income
for 2016 (business income) was $50,000. He had no Pension Adjustment for
2016. Susan also contributed $5,000 to her own RRSP on the same date. Her
unused RRSP Deduction Room at the end of 2016 was $5,500 and her Earned
Income for 2016 was $15,000. She had no Pension Adjustment for 2016.
While talking with James, you discovered that as a former member of the
Canadian Armed Forces he remains on call for high-risk search and rescue
missions. During the year 2017, James worked 275 hours as a volunteer on
search and rescue missions for which he did not receive any compensation.
James made charitable contributions of $3,000 during 2017 to the Canadian
Cancer Society. Last time James or Susan made any charitable donations goes
back to 2005. James also paid the following medical expenses for the year 2017:
Date Patient Nature expense Amount
June 1, 2017 James Chiropractor $ 800
June 5, 2017 Susan Prescriptions $ 900
Dec.20, 2017 Susan Prescriptions $ 900
Every 2 months Rick Prescriptions ($600 ea.) $3,600
TOTAL medical expenses for 2017 $6,200
Finally, James paid federal income tax instalments of $6,000 quarterly to the
CRA throughout the year 2017, for a total of $24,000.
James’ Specialty Bike Shop
Balance Sheet
As of December 31, 2017
Assets
Cash in bank $2,300
Accounts Receivable 3,600
Inventory on hand at end of year (Note 1) 25,000
Land (cost) 10,000
Building, net book value (Note 2) 162,167
Truck, net book value (Note 3) 38,500
Tools and Equipment, net book value (Note 4) 40,383
Total Assets$281,950
Liabilities
Accounts Payable$72,500
Bank Loan58,300
Owner’s Equity
James Doode, Capital151,150
Total Liabilities and Equity$281,950
Note 1: The opening inventory on January 1st of the year was $5,000.
Note 2: The building consists of a 3,000 sq.m. structure across the street from
James’ home, located at 124 Main Street, Anytown, Ontario, K0H 1H0. At least
half the surface is used as a showroom to sell his custom bikes. It was built by
James himself after he retired from the Armed Forces. The rest of the building is
used as a shop for mechanic work. The construction was completed on March 1,
2016 at a cost of $175,000. The UCC for tax purposes (class 1) at the beginning
of the year was $169,750.
Note 3: The truck consists of a Ford F150 extended cab pick-up that James
uses for both business and personal purposes – see Note 11 for operating
expenses. The truck was purchased on June 1, 2016 at a cost of $55,000. The
UCC for tax purposes at the beginning of the year was $25,500.
Note 4: The tools and equipment consist of various machines used for the
maintenance and customization of motorcycles for the business. The following is
the information relating to each asset:
CCA UCC Balance
Description class Jan.1, 2017
Customizing machine class 53 $0
Customizing tools class 8 $6,300
Computer-assisted design equipment class 12 $3,750
Computer class 50 $2,538
Class 53
A new customizing machine was acquired on January 20, 2017 at a cost of
$25,000.
Class 8
Various customizing tools were acquired on March 15, 2016 immediately after
the shop was opened for business. The cost of all tools together is $7,000. No
further tools were acquired or sold in 2016 or 2017.
Class 12
Computer-assisted design equipment was initially acquired on March 15, 2016 at
a cost of $7,500. However, during 2017 James decided to replace the computerassisted design equipment purchased in 2016 because it was not performing well
enough for the demands of his business. A new more powerful design
equipment was purchased on March 1, 2017 at a cost of $18,000. The vendor of
the new equipment accepted to take the old equipment in exchange. A trade
allowance of $5,000 was received for the old design equipment (net book value
for accounting purposes was $6,250).
Class 50
Computer hardware was purchased for general office work on March 15, 2016 at
a cost of $3,500 in total. No further additions were made in 2016 or 2017.
James’ Specialty Bike Shop
Statement of Revenues and Expenses
For the year ending on December 31, 2017
Revenues
Motorcycle and Parts Sales$515,000
Expenses
Purchase of inventory$225,000
Subcontractors-specialty painting 75,000
Local Advertising 2,500
Golf club dues (Note 5) 2,500
Business licences 1,500
Fines and penalties (Note 6) 2,700
Insurance (Note 7) 8,000
Office expenses 1,000
Home Office expenses, not including CCA (Note 8) 2,530
Business phone 2,000
Bank and interest charges (Note 9) 5,950
Salaries (Note 10) 75,000
CPP and EI contributions (employer portion) 5,062
Depreciation 29,600
Loss on sale of equipment (note 4) 1,250
Property taxes on shop 3,100
Gas & maintenance (Note 11) 6,500
Total Expenses$449,192
Net Profit (Loss) for accounting purposes$65,808
Note 5: James joined the local golf club so that he could find new customers.
His golf membership cost was $2,500 for the year.
Note 6: In 2016 James’ Specialty Bike Shop was charged a penalty for selling
branded motorcycle products without having the proper authorization as a
licensed distributor. James signed a new distributorship agreement in late 2017
and agreed to pay a fine of $2,700 to the brandname owner for previous
unauthorized transactions.
Note 7: The insurance expense includes the cost of the truck insurance of
$1,500 – see Note 11 below.
Note 8: During the year 2017, James decided that it would be more efficient to
have Susan work out of their home instead of working at the bike shop. Starting
March 1, 2017, a room in James and Susan’s home was set aside for the
exclusive use of Susan’s bookkeeping functions. The space used represents
10% of the entire surface of the home (20 sq.m). The costs paid by James for
the home office in 2017 (prorated for the period starting March 1) are as follows:
Home Insurance $1,500
Interest on mortgage $7,500
Property taxes $4,800
Home telephone line $500
Utilities $6,000
Maintenance and repairs $5,000
TOTAL $25,300 x 10% = $2,530
The home was acquired by James in 2015 at a cost of $500,000 of which
$90,000 was allocated to the land.
Note 9: The interest expense includes $1,150 paid during the entire year 2017
on a loan to acquire the truck used for the business – see Note 11 below.
Note 10: The salaries expense is for one mechanic (George Dewlitle) and one
bookkeeper (Susan Bond). George is paid a gross salary of $1,000 per week
($52,000/yr). James also employs his common-law partner, Susan, who does all
the bookkeeping for a gross salary of $23,000 per year. The T4 slip to Susan
indicated CPP withheld at source was $965.25 (box 16), EI withheld was $374.90
(box 18) and Federal Income tax withheld was $3,500.00 (box 22).
Note 11: James has an extended cab pickup truck that he uses for both
business and personal purposes. James says the truck is used 75% of the time
for the business – the rest is personal. Total distance driven for the year was
30,900km. Total expenses relating to the truck for the year paid by the business
were as follows (already included in income statement above):
Insurance $1,500
Interest on loan $1,150
Fuel $3,210
Car washes $290
Maintenance $3,000

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