Reference no: EM13662845

Question 1

Cindy Loo Hoo was born on January 1, 1969. She resides at 543 Apple Crescent, Winnipeg, Manitoba, R2G 1A1. Her telephone number is (204) 277-7777 and her Social Insurance Number is 111 000 111.

Cindy has the following income tax transactions for 2013:

• Cindy separated from her husband Ken, on May 1, 2013. They had been married for 10years, and they parted on good terms. Cindy verbally agreed to pay $50,000 to Ken to allow him to buy household furniture and make a down payment on a house. She also agreed to pay a monthly support allowance of $600 per month until Ken found a job. The $50,000 was paid in May2013, and the monthly support payments began on June 1, 2013, and continued throughout the remainder of 2013.
• In November 2013, Cindy left Readers Ltd., where she had worked since April 2000; she had not been a member of an RPP or a DPSP with that employer. In December 2013, she took a new job with Writers Ltd. She was a member of that company's RPP at the end of the 2013 taxation year. Following is a summary of the details on the T4 slips that Cindy received for 2013:

	Readers Ltd.	Writers Ltd.
Salary (Box 14)	$ 81,000.00	$ 5,000
CPP (Box 16)	2,356.20	-
EI (Box 18)	891.12	-
RPP (Box 20)	-	100
Tax withheld (Box 22)	20,000.00	1,000
Pension adjustment (Box 52)	-	400

• Cindy has a rental property in Winnipeg which she owned prior to getting married. She has given you the following information:

Gross rental	$   14,400
Rental expenses	(10,000)
Rental income	$   4,400

The UCC of the building was $150,000 on December 31, 2012. Cindy considers that the net rental income should be nil for 2013, since she can claim a CCA deduction of $4,400. The maximum available is $6,000 ($150,000 × 4%) because the property is the only asset included in class 1.

A fire completely destroyed the building on December 1, 2013. The insurer paid Cindy $180,000 for the building on December 29, 2013, and she then sold the land for $30,000 on the same date.

Cindy had acquired the property on August 15, 1999, at the following costs:

Land	$ 20,000
Building	$ 160,000

• Cindy loaned $2,000 in 2007 to Adam Ltd., an SBC. The rate of interest on the loan was 5%. On October 12, 2013, she was advised that Adam Ltd. had declared bankruptcy and that the entire loan and interest would not be paid.
• Cindy set up a sideline business effective July 1. The proprietorship provides local walking and hiking trips. The business year-end is December 31, 2013. She has provided you with the following information for 2013:

OUT AND ABOUT
Cash-Flow Statement from Proprietorship
July 1 to December 31
Cash receipts (Note a)		$ 28,000
Cash disbursements:
Advertising (Note b)	$2,200
Charitable donations	380
Equipment rental	3,450
Liability insurance	2,860
Licences (Note c)	680
Salary paid to Cindy	14,750
Supplies	3,870
Telephone-Long distance	610	(28,800)
Cash outflow		($ 800)

• Notes:

a. Cash receipts do not include $4,000 in payments received from customers in January for all December trips and outstanding accounts receivable.

b. Advertising includes $500 of meals and entertainment expenses relating to promoting business with clients.

c. Licences expense includes $400 for golf memberships for Cindy. She has met several potential new customers through the club. The remaining amount was for business licensing. Since Cindy has a sightseeing business, she has various annual license fees that she pays to the city for access to city sites.

d.   Cindy has not claimed a donation tax credit in prior years.

• In September, Cindy won a new car through a minor hockey association ticket raffle. The prize had an estimated fair market value of $18,000.
• On December 1, 2013, Cindy moved to avoid a 90-kilometre drive to her new workplace. Her new residence is 25 kilometres from the new workplace. In moving, she incurred the following expenses, which were not reimbursed by Writers Ltd.:

Legal expenses with respect to purchase of new residence	$	1,500
Cost of transporting household effects (Bumpem and Breakem Hauling Ltd.)	$	3,000
Commission on sale of old residence	$	10,000
New furniture, carpets, and drapes	$	5,000
Sale price of old residence	$	200,000
Cost of acquisition of new residence	$	250,000

• Cindy sold a painting in April 2013 for $3,000. The painting was acquired in 2000 for $1,000. She also sold 100 shares of a Canadian public corporation on November15, 2013, that were acquired in 1997:

POD	$ 20,000
ACB	$ 10,000
Brokerage commission	$   2,000

• She received an eligibledividend of $300 in 2013.
  
  Cindy has $20,000 of unused RRSP deduction room carried forward from 2012.

Required

a. Calculate Cindy's income for 2013 under section 3. Show all your calculations. Explain the tax treatment of any items not included in your section 3 calculations, and identify any deductions that Cindy can carry forward to 2014.

b. Manually compute Cindy's maximum deductible contributions to an RRSP for 2014.

c. Use Cantax to calculate and report Cindy's income-tax related transactions for 2013. State the values found in the following lines of the tax return:

i. Line 126

ii.  T1-S1-2, line 425

iii. T1-S1-1, line 349

iv. T1-S3, line 199

v. T776#01- 2, line 9924

d. Based on your answer in (a) regarding the deductibility of the payments made to Ken, what suggestion could you make to Cindy for 2013 and/or future taxation years if she consults you on January 1, 2014? Justify your answer by providing the appropriate references to the ITA.

e. Cindy received a Notice of Reassessment from the CRA dated November 18, 2013, and mailed the same day, amending her 2011 income tax return. The CRA disallowed her deduction for a business investment loss claimed in 2011. Cindy disagrees with the reassessment notice and has detailed information regarding the amount claimed. Advise Cindy on how to respond to this reassessment.

Procedure for part (c)

1. Start Cantax and open the tax return file TX1(2A). The basic personal information has been pre-entered. Save this tax return under your own initials.

2. Enter the amounts calculated in part (a) in the appropriate schedules. 

3. After entering all the data, display the tax summary. Cindy's net income should be equal to the net income you calculated in part (a).

4. Save the tax return and print schedules T1-1 to T1-4, T1-S1, T1-S3, T-1M#01, T776, T776#01-1, and T776#01-2. From the printouts, determine the answers to part (c).