Summer 2023 Taxation Midterm 1
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Summer 2023 Taxation Midterm 1 (80 minutes 40 marks)
Question 1 Recommended time 50 minutes (25 marks)
A condensed income statement for ACB Enterprises Limited for its 2022 year ended December 31, shows the following:
ACB Enterprises Limited
Condensed Income Statement
For the Year Ended December 31, 2022
Sales $3,832,500
Cost of sales (see (1) below) (3,439,000)
Gross profit 393,500
General and administrative expense (779,500)
Loss from operations (386,000)
Other income (deductions) 754,000
Net income before income taxes 368,000
Income taxes (160,000)
Net income after income taxes $208,000
The information in the following notes has already been reflected in the above condensed income statement:
An analysis of the cost of sales account revealed that the inventory values were as follows:
December 31, 2021 $1,680,000
December 31, 2022 $1,020,000
The inventory is valued at average cost. The cost of the closing inventory at December 31, 2022 exceeds fair market value by $10,000.
This write-down was not recorded in the financial statements since it was not considered to be material.
Contribution to a registered pension plan on April 14, 2023 for executives, allocated to 2022 expense by the corporation‘s accountant were as follows:
Registered Employment
Pension Plan compensation
President $17,000 $175,000
Vice President $11,000 $140,000
Accountant $9,000 $90,000
The pension plan is a defined contribution (money purchase) plan. The registered plan contribution above were matched by equal contributions made by the employees.
The company paid the following amounts to Sun Insurance Limited during the year:
Group term life insurance for employees, which was included in the $200,000 term life insurance policy on the president, which was included in the "Insurance" expense account ($500 x 12 months) 6000
ACB Enterprises Limited is the beneficiary of the insurance policy on the president. The life insurance policy on the president was assigned to the bank as collateral for a $500,000 loan from January 1 through May 30, 2022. The loan was repaid on June 1, 2022. The premiums paid equal the net cost of pure insurance related to this policy.
The following selected information was taken from the "Promotions" account:
Advertising in an exclusive foreign magazine not distributed in Canada $30,000
Advertising in Canadian magazine distributed only in Europe:
Advertising to appear in December 2022 $20,000
Advertising to appear in January 2023 3,000
Political contributions $2,500
Baseball tickets given to customers as Christmas gifts $2,800
Staff Christmas party $12,000
Total $69,300
The company's "Legal expense" account included the following legal fees:
Costs incurred in connection with negotiations for a line of credit at the bank $5,000
Cost of sale of capital assets during the year $2,050
$7,050
Other expenses deducted in the financial accounting computation of income include:
Amortization of capital assets 45,000
Appraisal to determine value of capital property prior to disposition 900
Damages under a breach of contract suit initiated by a supplier 3,550
Total $49,450
You have correctly determined that ACB Enterprises Limited is entitled to $110,000 capital cost allowance claim in 2022 and you have verified that this is correct.
Required:
(A) Based on the foregoing information, compute the income from business
for tax purposes for ACB Enterprises Limited for its 2022 fiscal year. Show all calculations whether or not they seem relevant to the final answer.
(B) Comment, briefly, on all items omitted from the calculation.
Question 2 ( 5 Marks 10 minutes)
Charlie Brown is employed by a public corporation. On January 1, 2019, he was given an option to purchase 10,000 shares of the public corporation for $12 per share (the option extended for two years).
On December 15, 2019, he exercised his option and bought 9,000 shares at $12 per share.
On June 15, 2022, he sold the 9,000 shares. The value of the shares at the particular dates was as follows:
|
Date option granted |
$14.00 |
|
Date option exercised |
15.00 |
|
Date shares sold |
19.00 |
Required:
1. Determine the amount and type of income received by Charlie Brown and when that income was taxable.
Question 3 (2 marks each Multiple choice, 1 mark for True/False) (10 marks 20 minutes)
Question 1
Is the following statement true or false: "CCA is a discretionary deduction? A taxpayer may claim, in any year, any amount from $0 to the maximum allowable CCA"?
a) True
b) False
Question 2
Which of the following cost would not be added to the capital cost of an automobile? a) Delivery costs from the factory
b) Cost of options added, such as panoramic sunroof
c) Cost of shipping the car from the plant to the dealership
d) Cost of insurance on the car for using the car for business purposes.
Question 3
Which CCA class would a passenger vehicle costing $31,000 belong to in 2022? a) Class 8
b) Class 10.1
c) Class 10
d) Class 43
Question 4
Is the following statement true or false: “A capital loss can occur on the sale of depreciable property”?
a) True
b) False
Question 5
In 2012, ABC Ltd purchased a new office building costing $400,000. The UCC was $180,484 at the end of 2021. The building was sold in 2022 for proceeds of cash which was $350,000.
Which one of the following statements is FALSE for 2022?
a) The company will have arecapture of $219,516
b) A capital loss will not be incurred for the sale of the building
c) Since the purchase was over $50,000 a separate class 1 was setup
d) Recapture occurs because the estimated decline in value was overstated (i.e. the asset was worth more in the end)
Question 6
XYZ Ltd purchased 4 photocopiers costing $7,500 each for a total of $30,000. The vendor gave $8,000 for the old equipment which originally costed $25,000. At the beginning of the current year, the Class 8 UCC balance was $16,000. What is the maximum CCA deduction for 2022
when you consider the above transactions?
a) $9,800
b) $5,400
c) $10,600
d) $7,600
2023-07-21