Question

Mr. Tim Scott is a professional engineer who began working as an administrator for NETCO Company, a large public company, in 2018 at a remote location in the province of Saskatchewan.

In January 2019, Mr. Scott was transferred to a new office located in Toronto, Ontario as part of a career advancement plan. He was forced to quickly sell his old residence and suffered a loss of $25,000 as a result. The new residence he bought in Toronto cost him $200,000 more than the price he could obtain from the sale of his old residence, and it was at least 40km closer to his new work place. Mr. Scott paid total moving costs of $50,000 to move to Toronto. To compensate Mr. Scott for the extra costs associated with the sudden move, the Company accepted to reimburse him the entire loss on the sale of his old residence as well as the entire moving expenses. The Company paid him the amount of $75,000 on December 1, 2019. On the advice of their accountant, no tax was withheld by the Company on that payment.

As a result of the move, Mr. Scott got rid of a number of personal assets he had stored for many years at his old residence. The relevant information for the assets sold in 2019 is the following:

			Selling
	Proceeds	Cost	Expenses
Home furniture	$1,500	$2,000	$0
Garden tools	$950	$850	$0
Coin Collection	$13,000	$20,000	$500
Sculpture	$11,000	$7,000	$500
Antique Clock	$17,000	$8,000	$500

Other Information:
1. For the year 2019, Mr. Scott's regular salary was a gross of $100,000. The following amounts were withheld from his gross salary during 2019:

Federal Income Tax	$15,000.00
Employment Insurance Premiums	$860.00
Canada Pension Plan Contributions	$2,749.00
Registered Pension Plan Contributions	$10,000.00
Charitable contributions (Centraide)	$1,000.00
Professional Dues	$1,200.00

2. Mr. Scott is a member of his employer’s money purchase (defined contribution) Registered Pension Plan ("RPP"). For 2019, his employer made a $20,000 matching contribution to the RPP on his behalf.   

3. During 2019, Mr. Scott was provided with an automobile that was acquired by the Company at a cost of $150,000 including all taxes. Total operating costs were $0.50 per km (or $25,000) for the year, all paid by the Company. The car was available to Mr. Scott the entire year except that during a 2-month period while he was in hospital as a result of a water-skiing accident he decided it was safer to leave the car at the Company's secured parking area instead of leaving it unattended at home. He drove the car a total of 50,000 kms during the year, of which 10,000 kms were personal. He reimbursed the Company $0.10 per km (or $1,000) for his personal use of the car.

4. On February 1, 2019, Mr. Scott received an amount of $50,000 playing the 6/49 lottery. He bought himself a boat for $25,000 and decided to contribute the remaining $25,000 to his RRSP account. Mr. Scott wants to deduct the maximum amount possible in 2019 for this RRSP contribution. Upon review of his tax records, you identified that at the end of 2018 Mr. Scott had $16,000 of Unused RRSP Deduction Room available for carryover to 2019, and no undeducted RRSP contributions at that time. Mr. Scott's Earned Income for 2018 was $100,000 and his pension adjustment for 2018 was $15,000.

5. Mr. Scott has for many years owned shares in Lemon Motors Company ("Lemon"), which are traded on the Toronto stock market. On July 31, 2019, Lemon paid an eligible dividend of $3.025 per share to Mr. Scott on all shares owned as of July 30, 2019. Below is a history of all his purchases and sales of shares in Lemon up until January 1, 2019:

Purchase, June 2014	2,000 shares @ $24 per share
Purchase, March 2015	5,000 shares @ $10 per share
Sale, December 2016	1,000 shares @ $30 per share
Purchase, March 2017	3,000 shares @ $35 per share
Sale, December 2018	1,000 shares @ $45 per share

6. On December 1, 2019, Mr. Scott decided to sell 4,000 shares he held in Lemon at $55 per share. He paid a 1% commission to his broker on this sale ($0.55/share).  

7. Mr. Scott is a 50% owner in a restaurant in Saskatchewan. During 2019, the restaurant was partially ravaged by a kitchen fire forcing the restaurant to close its doors for 9 months. Because the accident was caused by a negligent employee, the insurance company refused to pay for any of the damages. The restaurant owners have not yet decided if they will sue the negligent employee. For the fiscal period ended December 31, 2019, the business suffered an extraordinary loss for tax purposes of $150,000 50% of which was allocated to Mr. Scott.

8. Mr. Scott is 43 years old and has been living with Barbara (58 years old) for over 3 years now and her 20-year old son John. Barbara is self-employed and had Net Income of only $13,000 for 2019.  

9. John is legally blind since birth. In 2019, he was a full time university student for 8 months of the year and didn't work but received social assistance payments of $11,800 from the provincial government for the entire year. Mr. Scott paid for John’s tuition of $8,000 for 2019 and, in return, John agreed to transfer him the maximum tax credit possible.

10. Mr. Scott also paid for the following medical expenses in 2019:

Prescriptions drugs for Mr. Scott	$3,465.00
Medical specialists for John	$10,490.00
Prescription glasses for Barbara	$875.00
Liposuction for Mr. Scott	$2,463.00
Dentist for John	$3,300.00
Dentist for Barbara	$1,325.00

Required:  

A. Calculate the maximum RRSP deduction Mr. Scott can take for 2019 and determine if the $25,000 RRSP contribution made in February 2019 results for Mr. Scott in any penalties to be paid for 2019.   
B. Calculate Mr. Scott's minimum Net Income for Tax Purposes using the ITA 3 rules and format for the year 2019, as well as his Taxable Income for the year 2019.
C. Calculate Mr. Scott's minimum Net Federal Tax Payable (or refund) for the year 2019. Ignore any provincial tax and provincial credits.
In all cases, explain your answer, including detailed calculations, and provide reasons for omitting or excluding any item mentioned in the question. Ignore all GST/HST considerations. Assume all applicable elections were made and applicable forms and certificates are filed with CRA. You can use the following tax rates for 2019 to calculate federal tax payable:

Taxable Income In Excess Of	Federal Part I Tax	Marginal Rate On Excess
$ -0-	$ -0-	15%
$47,630	$7,145	20.50%
$95,259	$16,908	26.00%
$147,667	$30,535	29.00%
$210,371	$48,719	33.00%

QUESTION 1 ANSWER – SHOW ALL CALCULATIONS AND SUPPORT FOR YOUR ANSWER TO GET FULL MARKS

(A) RRSP deduction and penalties

(B) Net Income using ITA 3 rules and format and Taxable Income

(C) Tax Payable

Answer 1

Below is the solution, please comment if any further explaination needed

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1.      $1,155

2.      $184,281

3.      $26,153

Explanation:

(1)

Calculation of Penalty on the excess contribution of RRSP:

Amount in excess to $2000 of the allowed deduction is penalised @1% per month.

Assumption: The employer and employee contribution was paid at the beginning of the year.

Formulas used:

(2)

Net taxable income calculation:

Formulas used:

Points to be considered while doing calculations:

·        Reimbursement for relocation expenses is exempt

·        Employment Insurance Premium deduction is allowed from income tax

·        Contribution to RPP(Registered Pension Plan) is exempt from income tax both employer and employee contribution up to a limit.

·        As a contribution to Canada pension Plan is not exceeding the limit of $2,748.90, it is exempt.

·        Contribution to Centraide Charities is exempt under sec 149 of ITA.

·        Payment of the professional fee is also exempt from tax.

·        Home Furniture is a personal use asset, therefore loss will not be claimed and the cost and selling price of garden tools is less than $1000, it will not be considered for calculation.

·        As per Canada Revenue Agency's windfall rules, lottery winnings are not to be included in the taxable income.

·        RRSP deduction is allowed up to $26,500 in the year 2019.

·        We have assumed that the shares are sold using FIFO method.

·        Tax assumption is allowed up to $11,000 for a disabled child more than 18 years in age.

·        Only half of the capital gains are taxable and the whole amount of capital loss can be claimed

·        Only half of the loss in business is claimed.

(3)

Tax Liability Calculation:

Formulas used: