Exam (elaborations)
TAX 301 FINAL EXAM QUESTIONS AND VERIFIED ANSWERS
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TAX 301 FINAL EXAM QUESTIONS AND VERIFIED ANSWERS....
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Outline the 3 steps to determine if this is a source of property income ornot:
You purchase a small office building with space for 8 offices. All offices
are leased for 2 years or more. The lease requires that the building be
maintained by the landlord but that the tenants are responsible for
cleaning and caring for each of their own office spaces.
1. You acquired property to be used in an activity to earn income
2. There is no personal element to the activity
3. The level of activity does not reach the level of a business and is
passive in nature
4. The activity is a source of income from property
Outline the 3 steps to determine if this is a source of property income or
not:
You purchase a small office building with space for 8 offices. All offices
are leased for 2 years or more. The lease requires that the building be
maintained by the landlord but that the tenants are responsible for
cleaning and caring for each of their own office spaces. You hire
individuals to provide daily office cleaning services as well as provide 24
hours service guard.
1. You acquired property to be used in an activity to earn income
2. There is no personal element to the activity
3. The level of activity has reached the level of a business based on the
time, attention and labour required to be devoted to the activity
4. The activity is a source of income from a business
Outline the 3 steps to determine if this is a source of property income or
not:
You purchase a duplex and rent one of the units to your adult child at
half the market rental rate and the second unit to a long time friend who
has just lost his job. The arrangement is that the friend will pay the
municipal taxes and utility costs only, which together is less than half the
market rental rate.
,1. You acquired property to be used in an activity to earn income
2. There is a personal element to the activity given the nature of your
relationship with the tenants
3. The level of activity would suggest a passive nature.
4. No profit motive due to the personal element, there is no source of
income.
Outline the 3 steps to determine if this is a source of property income or
not:
You purchase a small apartment building with 8 separate apartments.
You rent one of the apartments to your adult child at half the market
rental rate and a second apartment to a long time friend who has just
lost his job. The arrangement is that the friend will pay the municipal
taxes and utility costs only, which together is less than half the market
rental rate. The other 6 apartments are rented to arms length persons at
the market rate. You provide cleaning and other services with respect to
the 6 apartments rented to arms length persons.
1. You acquired property to be used in an activity to earn income
2. There is a personal element to part of the activity given the nature of
the relationship with two of the tenants. There is no personal element to
the other 6 apartments
3. The level of activity would suggest an active involvement for the 6
apartments rented to arms length persons.
4. Only 6/8 of the apartments are a source of income
You personally own investments valued $200,000. You also own a home
with a mortgage remaining of $200,000. Using the direct use approach
concept, describe what you could do to make your mortgage interest
deductible under ITA 20 (1)(C).
1. sell the investments for $200,000
2. use the funds to pay off your mortgage
3. borrow $200,000 from the bank using your home as collateral security
4. Use the borrowed funds to repurchase the investments you sold
On January 1, 2022, Moreau Ltd. issues bonds with a maturity value of
$1,000,000 and a
maturity date of December 31, 2024. The bonds pay interest on
December 31 of each year
at an annual stated coupon rate of 4%. The bonds are sold for $985,000
for an effective
,yield of 4.57% [($15,000/$985,000)(3 years)]. The maturity amount is
paid on December 31,
2024. What are the income tax consequences related to this bond issue
for Moreau Ltd. in
each of the years 2022, 2023, and 2024? How would these income tax
consequences differ
from the information included in Moreau's accounting-based fnancial
statements (ASPE
or IFRS)? Moreau uses the straight-line method to amortize the discount
on the bonds for
accounting purposes. Determine the reconciliation adjustments that
would be required for
each of the three years
Income Tax Consequences:
Interest Expense = 1,000,000 * 4% = 40,000
Maturity Amount = 1,000,000
Bond Proceeds initially received= (985,000)
2023 Loss = 15,000
*Bonds are not issued for less than 97% of the maturity amount
*the 4/3 test is met since the effective interest rate of 4.57% does not
exceed 4/3 of the coupon rate (4/3*4%) = 5.33%
Accounting Treatment:
Annual interest payment = 1,000,000*4% = 40,000
Discount amortization = (1,000,000-985,000)/3 = 5,000
Annual interest expense = 40,000+5,000 = 45,000
Ms. Sheela Horne acquires a residential rental property in September
2022 at a total cost of
$685,000. Of this total, $142,000 can be allocated to the value of the
land and $543,000 to
the building. She immediately spends $35,000 to make major
improvements to the building.
Gross rents for the year total $17,200, while rental expenses other than
CCA total $15,100.
This is the only rental property owned by Ms. Horne. Determine the
maximum CCA that can
be claimed in 2022 and Ms. Horne's minimum rental income for the year.
Max CCA for Class 1
Initial Cost of the building = 543,000
, Capital Expenditure = +35,000
Capital Cost = 578,000
AccII = 150%
CCA Base = 867,000
Rate = 4%
Max CCA = 34,680
Rental Income
Gross Rents = 17,200
Rental Expenses other than CCA = (15,100)
Rental Income before CCA = 2,100
CCA (max) = (2,100)
Rental Income = nil
In 2022, Ms. Ellen Holt receives $15,000 in eligible dividends from
taxable Canadian
corporations (TCCs). Her income is such that all additional amounts will
be taxed at a 29%
federal income tax rate and a 14.5% provincial income tax rate. Her
provincial dividend tax
credit for eligible dividends is equal to 30% of the gross up. Determine
the total federal and
provincial income tax that will be payable on these dividends and her
after-tax retention.
Eligible Dividends received = 15,000
Gross up 38% = 5,700
Taxable Dividends = 20,700
Combined Rates (29% + 14,5%) = 43.5%
Income Tax before dividend tax credit = 9,005
Dividend tax credit = (6/11 + 30%)*5,700 = (4,819)
Federal/Provincial IT Payable = 4,186
After Tax retention = 15,000 - 4,186 = 10,814
In 2022, Mr. John Johns receives $17,000 in non-eligible dividends from
a taxable Canadian
corporation (TCC). His income is such that the non-eligible dividends will
be subject to a
federal income tax rate of 29% and a provincial income tax rate of 12%.
The non-eligible
dividend tax credit in his province of residence is 30% of the gross up.
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