Test Bank Byrd And Chens Canadian Tax Principles, 2016 - 2017 Edition Volume 2 And Solution.docx 6z5v28

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Canadian Tax Principles 2016 / 2017 Solutions Manual – Chapters 11 to 21

Solutions Manual Table of Contents – Chapters 11 to 21 For a listing of the subjects covered and difficulty of each Assignment Problem, please refer to the .PDF version of the Solutions Manual that is available 1at the Instructor’s Resource Centre on the online catalogue listing for this book, at catalogue.pearsoned.ca The table of contents is hyperlinked to the beginning of each Problem Solution. To go to a Solution, hold down the Control key and click on the solution listing. Control + Home will bring you back to this table of contents from anywhere in the document.

CHAPTER ELEVEN SOLUTIONS.........................227 Solution to Assignment Problem Eleven - 1........................227 Solution to Assignment Problem Eleven - 2........................230 Solution to Assignment Problem Eleven - 3........................232

Solution to Assignment Problem Eleven - 4........................234 Solution to Assignment Problem Eleven - 5........................237 Solution to Assignment Problem Eleven - 6........................239 Solution to Assignment Problem Eleven - 7........................242 Solution to Assignment Problem Eleven - 8........................247 Solution to Assignment Problem Eleven - 9........................253 Solution to Assignment Problem Eleven - 10......................256 Solution to Problem Tax Software Eleven - 1.....................261 Solution to Problem Tax Software Eleven - 2.....................263 Solution to Problem Tax Software Eleven - 3.....................265

CHAPTER TWELVE SOLUTIONS.........................274 Solution to Assignment Problem Twelve - 1.......................274 Solution to Assignment Problem Twelve - 2.......................275 Solution to Assignment Problem Twelve - 3.......................276 Solution to Assignment Problem Twelve - 4.......................278 Solution to Assignment Problem Twelve - 5.......................281 Solution to Assignment Problem Twelve - 6.......................284 Solution to Assignment Problem Twelve - 7.......................287 Solution to Assignment Problem Twelve - 8.......................288 Solution to Assignment Problem Twelve - 9.......................289 Solution to Assignment Problem Twelve - 10.....................291

CHAPTER THIRTEEN SOLUTIONS......................295 Solution to Assignment Problem Thirteen - 1.....................295 Solution to Assignment Problem Thirteen - 2.....................296 Solution to Assignment Problem Thirteen - 3.....................297 Solution to Assignment Problem Thirteen - 4.....................300 Solution to Assignment Problem Thirteen - 5.....................305 Solution to Assignment Problem Thirteen - 6.....................308 Solution to Assignment Problem Thirteen - 7.....................314 Solution to Assignment Problem Thirteen - 8.....................319

CHAPTER FOURTEEN SOLUTIONS....................327 Solution to Assignment Problem Fourteen - 1....................327 Solution to Assignment Problem Fourteen - 2....................329 Solution to Assignment Problem Fourteen - 3....................332 Solution to Assignment Problem Fourteen - 4....................333 Solution to Assignment Problem Fourteen - 5....................334 Solution to Assignment Problem Fourteen - 6....................336 Solution to Assignment Problem Fourteen - 7....................337 Solution to Assignment Problem Fourteen - 8....................339 Solution to Problem For Tax Software Chapter 14..............347

CHAPTER FIFTEEN SOLUTIONS.........................348 Solution to Assignment Problem Fifteen - 1........................348 Solution to Assignment Problem Fifteen - 2........................349 Solution to Assignment Problem Fifteen - 3........................351 Solution to Assignment Problem Fifteen - 4........................352 Solution to Assignment Problem Fifteen - 5........................353 Solution to Assignment Problem Fifteen - 6........................356 Solution to Assignment Problem Fifteen - 7........................359 Solution to Assignment Problem Fifteen - 8........................361 Solution to Assignment Problem Fifteen - 9........................363 Solution to Assignment Problem Fifteen - 10......................364

CHAPTER SIXTEEN SOLUTIONS........................366 Solution to Assignment Problem Sixteen - 1.......................366 Solution to Assignment Problem Sixteen - 2.......................367 Solution to Assignment Problem Sixteen - 3.......................369 Solution to Assignment Problem Sixteen - 4.......................371 Solution to Assignment Problem Sixteen - 5.......................373 Solution to Assignment Problem Sixteen - 6.......................376 Solution to Assignment Problem Sixteen - 7.......................378 Solution to Assignment Problem Sixteen - 8.......................380 Solution to Assignment Problem Sixteen - 9.......................383 Solution to Assignment Problem Sixteen - 10.....................385 Solution to Assignment Problem Sixteen - 11.....................388 Solution to Assignment Problem Sixteen - 12.....................391 Solution to Assignment Problem Sixteen - 13.....................393

CHAPTER SEVENTEEN SOLUTIONS..................394 Solution to Assignment Problem Seventeen - 1.................394 Solution to Assignment Problem Seventeen - 2.................396 Solution to Assignment Problem Seventeen - 3.................398 Solution to Assignment Problem Seventeen - 4.................401 Solution to Assignment Problem Seventeen - 5.................405 Solution to Assignment Problem Seventeen - 6.................406 Solution to Assignment Problem Seventeen - 7.................407 Solution to Assignment Problem Seventeen - 8.................409 Solution to Assignment Problem Seventeen - 9.................412

CHAPTER EIGHTEEN SOLUTIONS.....................416 Solution to Assignment Problem Eighteen - 1....................416 Solution to Assignment Problem Eighteen - 2....................417 Solution to Assignment Problem Eighteen - 3....................418 Solution to Assignment Problem Eighteen - 4....................420 Solution to Assignment Problem Eighteen - 5....................421 Solution to Assignment Problem Eighteen - 6....................422 Solution to Assignment Problem Eighteen - 7....................424 Solution to Assignment Problem Eighteen - 8....................425 Solution to Assignment Problem Eighteen - 9....................427 Solution to Assignment Problem Eighteen - 10..................428

CHAPTER NINETEEN SOLUTIONS......................429 Solution to Assignment Problem Nineteen - 1....................429 Solution to Assignment Problem Nineteen - 2....................431 Solution to Assignment Problem Nineteen - 3....................432 Solution to Assignment Problem Nineteen - 4....................433 Solution to Assignment Problem Nineteen - 5....................435 Solution to Assignment Problem Nineteen - 6....................436 Solution to Assignment Problem Nineteen - 7....................438 Solution to Assignment Problem Nineteen - 8....................439 Solution to Assignment Problem Nineteen - 9....................440

CHAPTER TWENTY SOLUTIONS.........................442 Solution to Assignment Problem Twenty - 1.......................442 Solution to Assignment Problem Twenty - 2.......................443 Solution to Assignment Problem Twenty - 3.......................445 Solution to Assignment Problem Twenty - 4.......................446 Solution to Assignment Problem Twenty - 5.......................447 Solution to Assignment Problem Twenty - 6.......................448

Solution to Assignment Problem Twenty - 7.......................449 Solution to Assignment Problem Twenty - 8.......................450 Solution to Assignment Problem Twenty - 9.......................451 Solution to Assignment Problem Twenty - 10.....................453 Solution to Assignment Problem Twenty - 11......................455 Solution to Assignment Problem Twenty - 12.....................456 Solution to Assignment Problem Twenty - 13.....................457 Solution to Assignment Problem Twenty - 14.....................459 Solution to Assignment Problem Twenty - 15.....................462

CHAPTER TWENTY-ONE SOLUTIONS................464 Solution to Assignment Problem Twenty-One - 1...............464 Solution to Assignment Problem Twenty-One - 2...............465 Solution to Assignment Problem Twenty-One - 3...............466 Solution to Assignment Problem Twenty-One - 4...............467 Solution to Assignment Problem Twenty-One - 5...............468 Solution to Assignment Problem Twenty-One - 6...............469 Solution to Assignment Problem Twenty-One - 7...............471 Solution to Assignment Problem Twenty-One - 8...............472 Solution to Assignment Problem Twenty-One - 9...............473 Solution to Assignment Problem Twenty-One - 10.............474 Solution to Assignment Problem Twenty-One - 11..............475

CHAPTER ELEVEN SOLUTIONS Solution to Assignment Problem Eleven - 1 2013 Analysis The required information can be calculated as follows: ITA 3(a) Business Income Taxable Dividends [(138%)($1,870)] ITA 3(b) Taxable Capital Gains [(1/2)($1,320)] Allowable Capital Losses [(1/2)($4,620)] ITA 3(c) ITA 3(d) Farm Loss (See Note) Net Income For Tax Purposes And Taxable Income

$19,800 2,581

$22,381

$ 660 ( 2,310)

Nil $22,381 ( 6,750)

$15,631

Note Dale’s farm losses are restricted as follows: Total Farm Loss Deductible Amount: First $2,500 One-Half Of $8,500 ($11,000 - $2,500) Restricted Farm Loss Carry Forward

$11,000 ($2,500) ( 4,250)

( 6,750) $ 4,250

As noted in the problem, none of the losses can be carried back before 2013. This would leave the following carry forward balances at the end of 2013:  

Restricted Farm Loss Carry Forward Net Capital Loss Carry Forward ($2,310 - $660)

$4,250 $1,650

2014 Analysis The required information can be calculated as follows: ITA 3(a) Farm Income Taxable Dividends [(138%)($2,351)] ITA 3(b) Taxable Capital Gains [(1/2)($2,200)] Allowable Capital Losses ITA 3(c) ITA 3(d) Business Loss Net Income For Tax Purposes 2013 Net Capital Loss Carry Forward Taxable Income (Loss)

$ 2,200 3,244 $ 1,100 Nil

$ 5,444 1,100 $ 6,544 ( 15,400) Nil ($ 1,100) Nil

Since there are taxable capital gains this year, and the problem states that Dale would like to deduct the maximum amount of his net capital loss carry forwards, the net capital loss carry forward of $1,100 is added to the balance of the non-capital loss.

The non-capital loss carry over is calculated as follows:

Business Loss 2013 Net Capital Loss Deducted ITA 3(c) Income

$15,400 1,100 ( 6,544)

Non-Capital Loss Carry Over For 2014 $ 9,956 The entire non-capital loss carry over could be carried back to 2013, but since Dale requires $15,400 in Taxable Income to fully utilize his tax credits, the maximum carry back to 2013 is $231, calculated as follows: 2013 Taxable Income (As Reported) Non-Capital Loss Carry Back From 2014

2013 Amended Taxable Income (Minimum)

$15,631 ( 231)

$15,400

This carry back leaves Dale with his required $15,400 in Taxable Income. There would be the following carry forward balances at the end of 2014:   

Restricted Farm Loss Carry Forward (Unchanged) Net Capital Loss Carry Forward ($1,650 - $1,100)] Non-Capital Loss Carry Forward ($9,956 - $231)

$4,250 $ 550 $9,725

2015 Analysis The required information can be calculated as follows: ITA 3(a) Business Income Farm Income Taxable Dividends [(138%)($3,160)] ITA 3(b) Taxable Capital Gains [(1/2)($4,400)] Allowable Capital Losses Net Income For Tax Purposes Restricted Farm Loss Carry Forward (Equal To Farm Income) Net Capital Loss Carry Forward (Less Than $2,200) Non-Capital Loss Carry Forward (All) Taxable Income

$33,000 3,465 4,361

$40,826

$2,200 Nil

2,200 $43,026 ( 3,465) ( 550) ( 9,725) $29,286

There would be the following carry forward balance at the end of 2015: 

Restricted Farm Loss Carry Forward ($4,250 - $3,465)

$ 785

2016 Analysis The required information can be calculated as follows: ITA 3(a) Taxable Dividends [(138%)($5,140)] ITA 3(b) Taxable Capital Gains [(1/2)($4,950)] Allowable Capital Losses [(1/2)($15,950)] ITA 3(c) ITA 3(d) Business Loss Farm Loss

$ 7,093 $ 2,475 ( 7,975) ($20,900) ( 2,200)

Nil $ 7,093 ( 23,100)

Net Income For Tax Purposes And Taxable Income

Nil

The available non-capital loss can be calculated as follows: Business Loss Farm Loss (Unrestricted) ITA 3(c) Income Non-Capital Loss Carry Over For 2016

$20,900 2,200

$23,100 ( 7,093) $16,007

Although technically, the farm loss is ed for separately from the non-capital loss, since the farm loss is less than $2,500 it is treated as an unrestricted farm loss and can be applied against all types of income. ITA 31 states that any loss allowed under that provision is considered an unrestricted loss from a farming business for the year for the purposes of calculating the non-capital loss carryover. As a result, the preceding loss carry over of $16,007 is available for carry back to 2015 to be applied against any type of income. With respect to the net capital loss of $5,500 ($7,975 - $2,475), there are $1,650 ($2,200 - $550) in taxable capital gains left in 2015 as the basis for a carry back. This means that $1,650 of the 2016 net capital loss can be carried back, leaving $3,850 ($5,500 - $1,650) to be carried forward as a net capital loss balance. If both the $16,007 non-capital loss and the $1,650 net capital loss were carried back to 2015, the result would be a Taxable Income of $11,629 ($29,286 - $16,007 - $1,650), less than the $15,400 that is required to fully utilize Dale’s available tax credits. As the net capital loss can only be deducted to the extent of taxable capital gains, it would be advisable to claim the full amount of this loss carry back. Based on this view, the non-capital loss deduction will be limited to $12,236 ($29,286 - $15,400 - $1,650), an amount that will provide for full use of Dale’s 2015 tax credits: 2015 Taxable Income (As Reported) Non-Capital Loss Carry Back From 2016 Net Capital Loss Carry Back From 2016 2015 Amended Taxable Income

$29,286 ( 12,236) ( 1,650) $15,400

These carry backs leave Dale with his required $15,400 in 2015 Taxable Income. There would be the following carry forward balances at the end of 2016:   

Restricted Farm Loss Carry Forward (Unchanged) Net Capital Loss Carry Forward ($5,500 - $1,650)] Non-Capital Loss Carry Forward (Nil + $16,007 - $12,236)

$ 785 $3,850 $3,771

Solution to Assignment Problem Eleven - 2 Before consideration of any carry backs, Lucinda would have 2015 Taxable Income as follows: Net Rental Income Interest Income Taxable Capital Gains

$ 91,450 38,275 17,300

Net Income For Tax Purposes And Taxable Income

$147,025

The loss on Recovery Inc. is a Business Investment Loss (BIL) However, because of her use of the lifetime capital gains deduction in 2014, $156,000 of this amount would be disallowed. Given this, the available Allowable Business Investment Loss (ABIL) would be calculated as follows: Total Loss Disallowed By Lifetime Capital Gains Deduction Use

Balance

$675,000 ( 156,000)

$519,000 Inclusion Rate

1/2

Allowable Business Investment Loss (ABIL)

$259,500

Using this value, Lucinda’s 2016 Taxable Income is calculated as follows: Income Under ITA 3(a) Net Rental Income Interest Income Income Under ITA 3(b) Taxable Capital Gains Allowable Capital Loss (Disallowed ABIL) [(1/2)($156,000)] (Note 1) Balance Under ITA 3(c)

$86,300 27,438

$113,738

$18,620 ( 78,000)

Deduction Under ITA 3(d) ABIL (Note 2) Net Income For Tax Purposes And Taxable Income

Nil $113,738 ( 259,500) Nil

Note 1 As the $156,000 disallowed BIL becomes an ordinary capital loss, it must be deducted against the 2016 capital gain. This leaves a net capital loss carry over of $59,380 ($78,000 - $18,620) of which $17,300 can be carried back to 2015. Note 2 As the ABIL was realized in 2016, it must be used to reduce that year’s income to Nil. Note that, because of this rule, Lucinda cannot deduct a smaller amount in order to have sufficient income to absorb her basic personal tax credit. After this deduction, a carry over of $145,762 ($259,500 - $113,738) remains. The amount that should be carried back is calculated as follows: 2015 Net Income For Tax Purposes (As Originally Calculated) Net Capital Loss Carried Back Optimum Taxable Income = 2015 Basic Personal Amount Non-Capital Loss Carried Back

$147,025 ( 17,300) ( 11,327) ($118,398)

As planned, these deductions would leave a Taxable Income of $11,327 ($147,025 - $17,300 - $118,398). The taxes on this amount will be eliminated by Lucinda’s basic personal credit. Since there was no 2014 Tax Payable, there

would be no carry back to that year. The following carry forwards remain after the carry back amounts are deducted:

Net Capital Loss Carry Forward ($59,380 - $17,300)

$42,080

Non-Capital Loss Carry Forward ($145,762 - $118,398)

$27,364

For the next 10 years, the ABIL will be treated as a non-capital loss carry forward that can be deducted against other sources of income. If it has not been utilized within the 10 years, it then becomes a net capital loss carry forward, deductible for an unlimited number of future periods, but only against net taxable capital gains.

Solution to Assignment Problem Eleven - 3 To the extent that there has been use of the lifetime capital gains deduction in previous years, business investment losses (BILs) are disallowed. When they are disallowed, they become ordinary capital losses that must be deducted against the current year’s taxable capital gains. Given this, the non-disallowed portion of the BIL would be calculated as follows: 2016 BIL Realized ($345,000 - $78,000) BIL Disallowed By Previous Use Of ITA 110.6 ($29,500 + $49,000) Remaining Business Investment Loss Inclusion Rate Allowable Business Investment Loss

$267,000 ( 78,500) $188,500 1/2 $ 94,250

Doug’s Net Income For Tax Purposes would be calculated as follows: Net Employment Income Allowable Business Investment Loss Net Taxable Capital Gains: Taxable Capital Gain [(1/2)($480,000 - $187,000 - $4,000)] Allowable Capital Loss (Disallowed ABIL) [(1/2)($78,500)] Net Income For Tax Purposes

$142,000 ( 94,250) $144,500 ( 39,250)

105,250 $153,000

Doug’s Taxable Income under the two different assumptions would be calculated as follows: Net Income For Tax Purposes Net Capital Loss Carry Forward Deducted Lifetime Capital Gains Deduction (Note) Taxable Income

Part A $153,000 ( 3,400) ( 5,300) $144,300

Part B $153,000 Nil ( 8,700) $144,300

Note As the only capital gains during 2016 are on qualified property, the simplified formula for the annual gains limit can be used. Given this, the lifetime capital gains deduction is the cumulative gains limit for both Part A and B as it is the least of the following: Amount Available [(1/2)($824,176*)] Amount Used [(1/2)($29,500 + $49,000)] Amount Available

Part A $412,088 ( 39,250) $372,838

Part B $412,088 ( 39,250) $372,838

*This is the 2016 limit for gains on dispositions of shares of a qualified small business corporation. For gains on qualified farm or fishing property, the 2016 limit would be $1,000,000. Taxable Capital Gain On Qualified Property ABIL Realized Allowable Capital Loss Deducted (Disallowed ABIL) Net Capital Loss Carry Forward Deducted Annual Gains Limit

Part A $144,500 ( 94,250) ( 39,250) ( 3,400) $ 7,600

Part B $144,500 ( 94,250) ( 39,250) Nil $ 11,000

Part A Sum Of Annual Gains Limits ($14,750 + $24,500 + $7,600) ($14,750 + $24,500 + $11,000) Amounts Deducted In Previous Years ($14,750 + $24,500) CNIL (Given) Cumulative Gains Limit

Part B

$46,850 $50,250 ( 39,250) ( 2,300) $ 5,300

( 39,250) ( 2,300) $ 8,700

In Part B, Doug will still have his $3,400 net capital loss carry forward, but will have used $3,400 more of his lifetime capital gains deduction. His Taxable Income in both cases is the same.

Solution to Assignment Problem Eleven - 4 Part A Mr. and Mrs. Resso’s Taxable Income would be calculated as follows: Mrs. Resso Nil Nil Nil Nil $14,000 5,320

Employment Income Receipts ed Pension Plan Receipts RRIF Withdrawals Eligible Dividends Received Gross Up On Dividends (38 Percent) Net Income For Tax Purposes And Taxable Income Before Any Transfer Of Dividends

$19,320

Mr. Resso $95,000 P 9,500 31,000 18,000 Nil Nil $153,500

Mrs. Resso’s Tax Payable would be calculated as follows: Federal Tax Before Credits [(15%)($19,320)] Tax Credits Basic Personal Age And Disability (Transferred To Mr. Resso) Medical Expenses (Note 1) Total Base Rate Dividend Tax Credit [(6/11)($5,320)] Federal Tax Payable

$2,898 $11,474 Nil Nil $11,474 15%

( 1,721) ( 2,902) Nil

Note 1 Without regard to who pays for them, medical expenses can be claimed by either spouse. As they must be reduced by the lesser of $2,237 and 3 percent of the taxpayer’s Net Income For Tax Purposes, in some circumstances, it is better for the expenses to be claimed by the lower income spouse. However, after the application of the basic personal and dividend tax credits, Mrs. Resso has no Tax Payable, resulting in a situation where she cannot make any use of the medical expense credit. Given this, Mr. Resso should claim the medical expenses, despite the fact that they will be reduced by a larger figure than would have been the case if Mrs. Resso claimed them. The transfer to Mr. Resso would be calculated as follows: Credits Available For Transfer: Age Disability Total Available Reduced By Excess Of: Mrs. Resso’s Net Income Over Basic Personal Credit Amount Available For Transfer

$ 7,125 8,001 $15,126 ($19,320) 11,474

( 7,846) $7,280

Since Mr. Resso has not applied for OAS, there can be no social benefits repayment. The federal Tax Payable for Mr. Resso would be calculated as follows: Tax On First $140,388 Tax On Next $13,112 ($153,500 - $140,388) At 29 Percent

$ 29,029 3,802

Tax Credits Basic Personal Spousal Including FCA (Income Too High) EI Canada Employment Age {$7,125 - [(15%)($153,500 - $35,927)]} Pension Medical Expenses (Note 2) Transfer From Spouse (Preceding Calculation) Credit Base Rate Federal Tax Payable

$32,831

($11,474) Nil ( 955) ( 1,161) Nil ( 2,000) ( 13,763) ( 7,280) ($36,633) 15%

( 5,495) $27,336

Note 2 The allowable medical expenses would be calculated as follows: Medical Expenses Reduced By The Lesser Of:  [(3%)($$153,500)] = $4,605  2016 Threshold Amount = $2,237 Allowable Medical Expenses

$16,000

( 2,237) $13,763

Part B - Eligibility For Transfer Mr. Resso’s current base for the spousal credit is nil. If Mrs. Resso’s dividends are transferred, she would be left with Net Income For Tax Purposes of nil, resulting in Mr. Resso being eligible for the full spousal tax credit. As this is an increase from the previous amount, the transfer is permitted. Part C If Mrs. Resso’s dividends are transferred to Mr. Resso, their new Taxable Income figures would be calculated as follows: Mrs. Resso $19,320 ( 14,000) ( 5,320) Nil

Net Income Before Clawback As Per Part A Dividend Transfer Gross Up Transfer Net And Taxable Income After Dividend Transfer

Mr. Resso $153,500 14,000 5,320 $172,820

The transfer to Mr. Resso would be calculated as follows: Credits Available For Transfer: Age Disability Total Available Reduced By Excess Of: Mrs. Resso’s Net Income Over Basic Personal Credit Amount Available For Transfer

$ 7,125 8,001 $15,126 Nil 11,474

( Nil) $15,126

With respect to Mr. Resso, his amount owing would be calculated as follows: Tax On First $140,388 Tax On Next $32,432 ($172,820 - $140,388) At 29 Percent Tax Credits Basic Personal Spousal Including FCA EI Canada Employment Age {$7,125 - [(15%)($153,500 - $35,927)]} Pension Medical Expenses (Note 3) Transfer From Spouse (Preceding Calculation) Credit Base Rate

$29,029 9,405

$38,434

($11,474) ( 13,595) ( 955) ( 1,161) Nil ( 2,000) ( 13,763) ( 15,126) ($58,074) 15%

( 8,711)

Dividend Tax Credit [(6/11)($5,320)] Federal Tax Payable

( 2,902) $26,821

Note 3 The allowable medical expenses would be calculated as follows: Medical Expenses Reduced By The Lesser Of:  [(3%)($$172,820)] = $5,185  2016 Threshold Amount = $2,237 Allowable Medical Expenses

$16,000

( 2,237) $13,763

The use of the ITA 82(3) dividend transfer has decreased Mr. Resso’s federal Tax Payable by $515, from $27,336 to $26,821.