INFORMATION TO USE FOR THE TAX RETURN CASE STUDY:
James Doode decided to start his own business in 2018 after retiring from the Canadian Armed Forces. Upon retirement in 2017, James elected to receive immediate monthly pension payments from his former employer's pension plan. James’ business consists of a motorcycle shop known as
James’ Specialty Bike Shop, selling and repairing motorcycles (industry code 441220). James proudly specializes in customizing motorcycles to very exclusive clients.
James hired you to prepare his personal tax return for the year 2019, as well as for his common-law partner, Susan Bond. James and Susan want to pay the very least tax possible. They will use any election or choice legally available to them to achieve that objective. James' income is mainly from his pension and personal business, while Susan's income is mainly from her salary as bookkeeper for James' business. Attached is an Appendix showing the relevant financial information pulled from the accounting records for James' business. The amounts shown have
not
been adjusted for tax purposes. James expects you to identify which items are allowed for tax purposes to comply with the tax laws in Canada.
James and Susan have other income from their investments and rental property. Below is the information needed to prepare their tax returns. Tax forms James and Susan received are included on the Case Study link as separate documents confirming the various items of income earned for the year.
Detailed Information:
James was born on November 1, 1969. He is divorced but currently lives with Susan Bond, his common-law partner, at 123 Main Street, Anytown, Ontario, K0H 1H0. Both have been living together for several years now. James’ Social Insurance Number (SIN) is 527-000-145. Susan’s SIN is 130-692-544. Susan was born on December 2, 1969 and has been blind since birth but still manages to work as a bookkeeper for James’ business - see separate T4 slip attached issued to Susan for 2019 and financial information for James' business in the Appendix below. Susan also has income from joint investments with James - see further below.
During 2019, James received bi-weekly pension payments from his former employer's pension plan for a total pension income of $70,000 - see T4A slip attached issued to James for 2019 (box16). Federal income tax of $10,000 was withheld at source on that pension income - see box 22 of the T4A slip.
James has spousal support obligations from his previous marriage. He is required to pay $1,000 per month to his former spouse (Mary Doode; SIN: 527-000-129) in accordance with a court order. During the year 2019, James was only able to pay 6 months worth of support. James and Susan have no children but James' older brother Rick lives with them on a permanent basis since 2015 as he cannot live on his own due to a permanent mental disability. Rick was born on June 10, 1966 and has $9,000 of social assistance income for 2019 under the Ontario Disability Support Program. His SIN is 527-000-947. Forms T2201 have already been filed with CRA in previous years for both Susan and Rick and their condition has not changed since.
During 2019, James received $12,000 of eligible dividends on shares he owns of the Great Bank of Canada, a Canadian public company - see the T5 slip James received from the bank (box 24) for 2019. No income tax was withheld on that dividend. James and Susan earned interest income for a total of $7,000 during 2019 from a joint investment account (co-owned 50% each) - see the T5 slip James and Susan received from the bank as co-owners (box 13). No income tax was withheld on that income. During the year 2019, James met with a financial planner to obtain investment advice on how to maximize his investment income. Fees of $2,000 were paid by James in 2019 to the financial planner. Following the advice obtained, James sold 1,500 shares of the Great Bank of Canada (a publicly traded company) that he had acquired over the last 10 years with an average cost of $28.00 per share. The shares were sold on June 1, 2019 at a price of $65.00 per share, on which a 1% commission was paid to a broker ($0.65 per share).
Rental Activities
James and Susan acquired jointly (50% each) a residential property during 2019 which they rent out to earn income. The property was acquired on February 1, 2019 and rented-out for a 1-year period to a young family that recently moved to the area for $3,000/month. Below is the information relating to that property for 2019, which is co-owned in equal share by James and Susan (50% each):
Address: 121 Main Street, Anytown, ON (co-owned by James and Susan equally, 50% each)
Cost of property purchased: $355,000 of which $45,000 was for the land.
Cost of additions made to the building in December 2019: $80,000 (addition of a garage). Due to this addition, it was agreed that the rent for the home will increase to $3,500/month starting January 1, 2020.
Revenues
Gross Rents $30,000
Expenses
Property taxes $3,200
Insurance 1,100
Interest on mortgage 6,300
Mortgage principal 1,525
Regular maintenance & repairs 3,000
During 2019, James and Susan sold a cottage they also jointly owned (50% each) and used exclusively for their personal enjoyment, located at 123 Beach Lane, AnyLake, ON. They had purchased the cottage back in 2008 at a cost of $75,000. They sold the cottage on June 15, 2019 for $250,000 cash. All transaction costs were borne by the purchaser. James and Susan do not want to designate the cottage as their principal residence because they feel their current home has a much greater accrued gain and want to preserve the principal residence tax exemption for that property instead. James also sold a boat he owned on the lake for their personal use when at the cottage. The boat had a cost of $25,000 and was sold for $15,000 on June 20, 2019.
During 2019, James enrolled in a highly specialized mechanics course with a local college. James paid tuition fees of $10,000 for 2019 - see form T2202A sent by the college for 2019. James wants to claim the maximum credit he can this year and carry over any unused balance.
James contributed $20,000 into his own RRSP on September 1, 2019. James wants to deduct the maximum amount this year. His unused RRSP Deduction Room at the end of 2018 was $9,500 and his Earned Income for 2018 (business income) was $50,000. He had no Pension Adjustment for 2018. Susan also contributed $5,000 to her own RRSP on the same date. Her unused RRSP Deduction Room at the end of 2018 was $1,500 and her Earned Income for 2018 was $15,000. She had no Pension Adjustment for 2018.
While talking with James, you discovered that as a former member of the Canadian Armed Forces he remains on call for high-risk search and rescue missions. During the year 2019, James worked 275 hours as a volunteer on search and rescue missions for which he did not receive any compensation.
James made charitable contributions of $5,000 during 2019 to the Canadian Cancer Society (a registered charity). Last time James or Susan made any charitable donations goes back to 2005.
James also paid the following medical expenses for the year 2019:
Date Patient Nature expense Amount
June 1, 2019 James Chiropractor $2,000
June 5, 2019 Susan Prescriptions $ 900
Dec.20, 2019 Susan Prescriptions $ 900
Every 2 months Rick Prescriptions ($600 ea.) $3,600
TOTAL medical expenses for 2019 $7,400
Finally, James paid federal income tax instalments of $2,500 quarterly to the CRA throughout the year 2019, for a total of $10,000.
APPENDIX
Accounting Information for 2019
James’ Specialty Bike Shop
Revenues
Motorcycle and Parts Sales $432,000
Expenses
Purchase of inventory (Note 1) $195,000
Local Advertising 5,100
Golf club dues (Note 2) 4,000
Fines and penalties (Note 3) 2,900
Insurance (Note 4) 8,000
Office expenses 3,000
Home Office expenses, excluding depreciation (Note 5) 2,940
Salaries (Note 6) 55,000
Employer contributions to CPP and EI 3,695
Depreciation (Note 7) 54,050
Loss on sale of equipment (note 7) 6,250
Truck Gas & maintenance (Note 8) 5,900
Total Expenses $345,835
Note 1:
The opening inventory on January 1, 2019 was $10,000. The closing inventory on December 31, 2019 was $25,000.
Note 2:
James joined the local golf club to find new customers. The membership cost was $4,000 for the year.
Note 3:
In 2019 the business was sued for selling branded motorcycle parts without proper authorization from the brand owner. James signed a new distributorship agreement with the brand owner effective January 1, 2019 and part of the agreement provides that James will pay a penalty of $2,900 for pre-2019 transactions that were completed without proper authorization, in exchange for the brand owner dropping the charges against James. The penalty was paid February 1, 2019.
Note 4:
The insurance expense includes the cost of the truck insurance of $1,500 – see Note 8 below.
Note 5:
Starting March 1, 2019, James moved the bookkeeping office from the shop to his home. A room representing 12% of the 1,000sq.m. home was set aside for the exclusive use of Susan's bookkeeping functions. The home has a cost of $500,000. Below are the costs for 2019 relating to the home office space:
Home Insurance $1,500
Interest on mortgage $7,500
Property taxes $4,800
Home telephone line $500
Utilities $6,200
Maintenance and repairs $4,000
TOTAL $24,500 x 12% = $2,940
Note 6:
There are 2 employees: one mechanic (George Dewlitle) and one bookkeeper (Susan Bond). George was paid a gross salary of $37,000 for 2019. Susan was paid a gross salary of $18,000 for 2019. The T4 slip for Susan is included as a separate pdf document to this case study for your information, confirming the CPP contributions ($739.50 - box 16), EI premiums ($291.60 - box 18) and Federal Income tax ($4,000.00 - box 22) withheld at source on her salary for 2019.
Note 7:
The following is the information relating to the fixed assets of the business.
Building:
The building is 3,000 sq.m. located at 124 Main Street, Anytown, ON. Half the surface is used as a showroom for the customised motorcycles. The rest of the building is used as a shop for mechanic and customization work. The building was constructed on March 1, 2018 at a cost of $195,000. The UCC for tax purposes (class 1) at the beginning of 2019 was $189,150.
Truck:
The truck is a Ford F150 extended cab pick-up that James uses for both business and personal purposes – see Note 8 for operating costs. The truck was purchased on June 1, 2018 at a cost of $55,000. For tax purposes, maximum CCA was deducted in 2018 leaving a UCC balance on January 1, 2019 of $25,500.
Other Tangible Assets:
The following details relate to the other fixed assets used in the business:
CCA UCC Balance
Description class Jan.1, 2019
Customizing tools and equipment class 53 $9,000
Computer-assisted design equipment class 12 $7,500
Computer class 50 $2,538
Office furniture class 8 $4,500
Class 53
Customizing tools were acquired on March 1, 2018 at a total cost of $12,000. For tax purposes, maximum CCA was deducted in 2018 leaving a UCC balance on January 1, 2019 of $9,000. Additional new equipment was acquired on December 1, 2019 at a cost $75,000.
Class 12
Computer-assisted design (CAD) equipment was acquired on March 1, 2018 at a cost of $15,000. For tax purposes, maximum CCA was deducted in 2018 leaving a UCC balance on January 1, 2019 of $7,500. During 2019, James decided to replace the CAD equipment because it was not performing well enough for the demands of his growing business. A new more powerful CAD equipment was purchased on March 1, 2019 at a cost of $55,000. The vendor of the new equipment accepted to take the old equipment in exchange. A trade allowance of $5,000 was received for the old equipment. The net book value for accounting purposes was $11,250 resulting in a loss of $6,250 included in the total expenses for accounting purposes for the year.
Class 50
Computer hardware was acquired on March 15, 2018 at a total cost of $3,500. For tax purposes, maximum CCA was deducted in 2018 leaving a UCC balance on January 1, 2019 of $2,538. No further additions were made in 2019.
Class 8
Office furniture was acquired on March 1, 2018 at a total cost of $5,000. For tax purposes, maximum CCA was deducted in 2018 leaving a UCC balance on January 1, 2019 of $4,500. No further additions were made in 2019.
Intangible Assets:
On January 15, 2019, James signed a new 25-year distributorship agreement with the owner of a well-known motorcycle brand. James paid $60,000 to obtain the 25-year license, which is effective January 1, 2019.
Note 8:
James has a truck that he uses for both business and personal purposes. Total distance driven for the year was 29,500km of which 90% were for business (26,550km). Total truck expenses for 2019 paid by the business were as follows (included in the financial information above):
Insurance $1,500
Fuel $2,900
Maintenance $3,000