Reference no: EM132252842
Assignment 1:
Mr. Smith is restructuring his portfolio of assets to supplement his income. He has provided you with the following details. On January 1, 2018, he had undepreciated capital cost for each class of assets for his unincorporated business as follows:
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Class 8
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- office furniture and equipment
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60,000
|
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Class 10.1
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- automobiles
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17,850
|
|
Class l2
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- small tools
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5,000
|
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Class 13
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- leasehold improvements
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175,000
|
The following additional information was found in the 2018 audit files:
(1) New office furniture was purchased for $20,000. This purchase replaced old assets, which were sold for $5,000. None of the old assets were sold for more than original cost.
(2) Some small tools were sold for a total of $7,000. All of these tools were sold at a price less than their original cost.
(3) The opening balance in Class 13 represents leasehold improvements of $210,000 made during 2016 to the leased warehouse for his business. During 2018, further leasehold improvements were made to the same leased warehouse at a cost of $24,000. The remaining lease term was five years with two successive two-year renewal terms.
(4) The Class 10.1 automobile was purchased in 2016 for $34,000. During 2018, it was sold for $21,000. A new automobile was purchased for $45,200, which included HST of $5,200 (13%). The operating cost of the vehicle for the year was $6,000 (net of HST) including insurance. He drove the car 80% for business purposes.
(5) A license (expected to be used indefinitely) was purchased for $60,000 in June 2018.
(6) A new computer was purchased in January 2018 for $7,000.
(7) Mr. Smith is registered to collect and remit HST.
8) He sold his existing home and his cottage during the year and moved into a condominium. His home was purchased in 2002 at a cost of $85,000. He sold it in May 2018 for proceeds of $250,000. He paid real estate commission of $12,000 on this sale. His cottage was purchased in 2003 at a cost of $120,000. He sold it in September 2018 for proceeds of $320,000. He paid real estate commission of $10,000 on this sale. He did not own any other residences during the relevant years and, thus, has not previously designated any of the relevant years for purposes of the principal residence exemption.
9) He sold the following personal items during 2018:
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|
Proceeds |
Cost |
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Antique coat rack................................................................................
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$ 1,500
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$ 200
|
|
Coin collection.....................................................................................
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450
|
1,200
|
|
Stamp collection..................................................................................
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1,100
|
100
|
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1964 Ford (a collector's item)........................................................... ................................................................................................................ ................................................................................................................
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7,000
|
12,000
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10) He sold one of two rental properties that he owns (Rental #1). He sold the property for total proceeds of $500,000. The details of the sale of Rental #1 are as follows:
|
|
|
Land |
Building
(Class 3)
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Equipment
(Class 8)
|
|
Original cost
|
|
$125,000
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$175,000
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$38,000
|
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UCC, December 31, 2017
|
|
n/a
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135,000
|
16,000
|
|
Proceeds, June 30, 2018
|
|
260,000
|
220,000
|
20,000
|
The proceeds received included $200,000 cash paid on July 1, 2018, and a mortgage for $300,000 amortized over 15 years with a four-year term. The interest rate on the mortgage is 8% payable monthly. Principal repayments of $10,000 are to be made on January 1 each year, commencing January 1, 2019. At the end of the four-year term, the balance of the mortgage will be paid in full.
Details of his rental income for the year before the above sale of Rental #1 are as follows:
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|
|
Rental #1 |
Rental #2 |
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Gross rents...................................................................................... ..........................................................................................................
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$25,000
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$ 15,000
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|
Expenses:
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|
|
|
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Mortgage interest.................................................................
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|
-
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(25,000)
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|
Property taxes......................................................................
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(3,000)
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(3,500)
|
|
Insurance..............................................................................
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(2,000)
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(2,400)
|
|
Maintenance........................................................................
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(8,000)
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(1,500)
|
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Amortization........................................................................
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(7,000)
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(4,500)
|
|
Net income (loss).................................................................
|
|
$ 5,000
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($21,900)
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The undepreciated capital cost of Rental #2 (Class 1) was $83,236 on December 31, 2017.
11) Mr. Smith's unincorporated retail business has accounting profits before taxes of $150,000 in 2018. Depreciation deducted for accounting purpose on the unincorporated retail business was $30,000.
Required:
Determine Mr. Smith's net income for tax purposes for 2018 as a result of the above information. Show all of your calculations.