Reference no: EM132304178

Question 1

Graydon Construction Ltd. (GCL) has the following sources of income for the year ended December 31, 2018:
• Net income for tax purposes includes the following:
o business income from a construction business - $502,000
o income from interest on seasonal cash in business bank account (not included above)
- $2,000
o rental income from operation of small apartment building (one employee runs this property) - $42,000
o capital gain on sale of vacant land - $500,000
o eligible dividends received on portfolio investments from corporations - $65,000
o non-eligible dividends of $200,000 received from its 90%-owned Canadian subsidiary, Graydon Investments Inc. (GII); this subsidiary received a dividend refund of $35,000 and does not generate any active business income

• The following additional information is provided at a year-end meeting with GCL:
o The company has a net capital loss carryforward of $262,000.
o The company made charitable donations this year of $6,000 (these have not been deducted from business income above).
o The company earns all of its income in Canada.
o The balance in the refundable dividend tax on hand account is $27,000 at December 31, 2017.
o The company paid a non-eligible dividend of $60,000 in 2018.
o During 2017 GCL paid a dividend of $50,000 and received a dividend refund of $2,600.

• The management of GCL tells you that during 2018 two new corporations were incorporated (in addition to GCL and GII, the 90%-owned subsidiary mentioned above):

o Graydon Home Limited (GHL) was incorporated as a holding company for all the GCL shares. Marcin, formerly the sole shareholder of GCL, is the sole shareholder of GHL. In 2018, GHL had taxable and (deemed) active business income of $100,000.
o Lucinda's Shoes Limited (LSL), was created through the incorporation of Lucinda's retail store which was formerly a proprietorship. Lucinda, Marcin's spouse, is the sole shareholder. In 2018, LSL had taxable income and active business income of
$150,000.

• If either GHL, LSL or GII is determined to be associated with GCL, Marcin has agreed to allow the associated company to use as much of the small business limit as is needed to maximize the small business deduction. GCL will use the balance, if any is left.

Required:

For the 2018 taxation year:

a) Determine net income for tax purposes.

b) Determine taxable income, noting any amounts to be carried forward to a future year and restrictions on the use of carryforward amounts.

c) Determine the amount of active business income.

d) Calculate the business limit for the purposes of the small business deduction. Identify whether or not GCL is associated with GII, GHL and LSL and explain your answer.

e) Determine the amount of aggregate investment income.

f) Determine the Part I tax payable for the year.

g) Determine the Part IV tax payable for the year.

h) Determine the refundable portion of Part I tax for the year.

i) Determine the RDTOH balance at year-end.

j) Determine the amount of any dividend refund for the year.

k) Determine the amount of dividend that should be paid in 2019 to obtain a full refund of the RDTOH at the end of 2018.

Question 2

It is 2019 and your friend Carlos had an eventful 2018. During 2018, he invested an amount of money he inherited in 2017, he continued a business he started in 2017 and he had a change in his personal life. Carlos would like your help with determining his income taxes owing for 2018. From the information provided you learned the following:

1. Carlos's ex-wife, Angelica, is employed as a bookkeeper and she earns a salary of $55,000. To help Carlos, she prepared an income statement for tax purposes for his proprietorship. You have reviewed the statement and supporting calculations and found them to be accurate. The net loss from the business for tax purposes was $96,066 for 2017 and $15,000 for 2018. The resulting non-capital loss carryover of $45,966 from 2017 has been carried forward, and Carlos would like to use it this year if possible.

2. On February 28, 2018, Carlos purchased two rental properties in a townhouse complex for $200,000 each. For each property, $50,000 was allocated to the cost of the land. The properties generated rental income of $48,000 in 2018. His expenses associated with these properties totalled $44,000 in this first year before CCA.

3. Carlos decided to help his sister who has set up a Canadian-controlled private corporation (CCPC). He purchased shares in her business for $100,000, and at the end of the year he received a non-eligible dividend of $30,000 and a capital dividend of $12,000.

4. He put aside $250,000 in a savings account in his five-year-old daughter Sofia's name. The account earned $3,500 in interest during 2018. Sofia also personally earned $500 from another source.

5. In 2010, Carlos purchased a piece of vacant land for $59,000. At the time, he had planned to begin a retail business, and purchased the land as the location for his store. However, as the town grew he received an unsolicited offer and sold the land in 2017 to a developer for $600,000. Carlos agreed to take back an interest-free mortgage on the sale. The developer paid $100,000 in 2017 and $250,000 in each of 2018 and 2019. Carlos reported this income from the sale as a capital gain and claimed the maximum capital gains reserve that was permitted in that year.

6. Carlos paid a financial advisor $1,500 in 2018 to assist him with his investing decisions.

Angelica left Carlos in 2017 and the couple signed a legal separation agreement on December 31, 2017. Since then, he has been paying spousal support payments of $1,500 per month for all of 2018. He also gave Angelica $225,000 on January 1 just after they signed their separation agreement. Carlos does not have a regular full-time job anymore so he and his ex-wife agreed that he would get full custody of their daughter Sofia. Carlos paid $7,000 for child care for his daughter during the year. As well, Sofia went to an overnight summer camp for two weeks at a cost of $1,500 per week.

Carlos has RRSP contribution room of $40,000 for 2018. In 2018, he contributed $6,000. In addition, Carlos contributed $15,000 to Sofia's Registered Education Savings Plan (RESP) during the year.

Carlos's mother Isabella moved in with him after his wife left. Isabella is a big help around the house. She is 72 years old and received interest income of $16,917 from her bank account. Isabella is not eligible for Old Age Security payments as she had not lived in Canada before moving in with Carlos and Sofia.

Carlos has paid the following medical expenses for Sofia, Isabella and himself during 2018:

Required:

a) Determine Carlos's net and taxable income for 2018. Where it is necessary to choose between a variety of calculations, show all calculations, including those where the result is 0. Explain any omitted items.

b) Determine Carlos's federal taxes payable for 2018. Explain any items omitted from the calculation.

c) Explain three features of the RESP that Carlos has set up for his daughter.