Assignment 2: Modules 5 and 6 (
100 marks; 15%)
Introduction
Assignment 2 is based on Modules 5 and 6 and should be completed at the end of Module 6. To solidify your understanding of the content of the two modules covered, be sure to complete the self-test questions set out in the modules’ activity checklists before you start the assignment.
Instructions
Read the following information and then answer the related questions. If you have difficulty completing this assignment, go back and closely review the assigned material again.
Question 2 (
30 Marks)
For the taxation year ending December 31, 2023, the income statement of Markham Ltd. was as follows:
Revenues $973,000
Expenses:
Cost of Goods Sold ($272,000)
Selling and Administrative Expenses (132,000)
Amortization Expense (156,000)
Other Expenses (137,000) (697,000)
Income before Income Tax Expense $276,000
Income Tax Expense:
Current ($ 97,000)
Future (32,000) (129,000)
2023 Net Accounting Income $147,000
Other Information:
1. The Company spent $6,000 during the year on landscaping for its new building. For accounting purposes, this was treated as an asset. The Company will not amortize this balance as it believes the work has an unlimited life.
2. Selling and Administrative expenses include $15,000 in business meals and entertainment.
3. Selling and Administrative expenses include membership fees for several employees in a local golf and country club. These fees total $3,400.
4. Other Expenses included donations to registered charities of $3,700.
5. Other Expenses included bond discount amortization of $2,500.
6. In 2023, Markham Ltd. purchased a competing business at a price that included goodwill of $70,000. For accounting purposes, there has been no impairment or write-down of the goodwill since its purchase.
7. As the Company expected to issue more shares in 2024, it made several amendments to its articles of incorporation in 2023. Legal expenses, included in Other Expenses, totaled $6,000.
8. On January 1, 2023, the Company had UCC balances for the following classes of depreciable property:
Class 1 $400,000
Class 8 575,000
Class 10 45,000
Class 13 68,000
The Class 1 balance related to a single building acquired in 2003 at a cost of $550,000. It was estimated that the value of the land at this time was $50,000 and the building $500,000. On February 1, 2023, the building was sold for $612,000. It was estimated that the value of the land was unchanged at $50,000 and that the value of the building was $562,000. For accounting purposes, the carrying value of the property was $507,000: $457,000 for the building and $50,000 for the land. The resulting gain on the building was included in the accounting revenues. The old building was replaced on February 15, 2023, with a new building acquired at a cost of $683,000, of which $60,000 was for the land and $623,000 for the building. The Company chose not to elect a separate Class 1 so it did not qualify for the 6% CCA rate. No elections were made with respect to the replacement of the building.
There were no dispositions of any Class 8 property in 2023 however there were purchases of Class 8 property of $126,000.
As the Company had decided to lease all of its vehicles in the future, all of the Class 10 properties were sold during the year. The capital cost of the properties sold was $93,000 and the sale proceeds were $37,000. The carrying value for accounting purposes was $52,000 and the resulting accounting loss of $15,000 ($37,000 – $52,000) was included in Other Expenses.
The Class 13 balance related to a single lease that commenced on January 1, 2021. The lease had an initial term of seven years, with two successive options to renew for three years each. Expenditures on this leasehold were $50,000 in 2021 and $27,000 in 2022. There were no further expenditures in 2023. The write-off of these expenditures for accounting purposes was included in Amortization Expense.
9. Other Expenses included interest on late income tax instalments of $500 and on late municipal tax payments of $275.
10. Markham Ltd. claimed the maximum CCA in each year.
Required: Determine Markham Ltd.’s 2023 net income. In addition, calculate the January 1, 2024 UCC for each CCA class. Ignore immediate expensing and any GST/HST and PST considerations.
Question 3 (
20 Marks)
Carol Basque is an experienced lawyer who carried on a business as a sole proprietor. She carried on the business out of a new building which she purchased several years ago for $725,000, with $175,000 paid for the land and $550,000 for the building. The building was used exclusively for business purposes, and an election was filed to include it in a separate Class 1. The UCC on January 1, 2023 was $447,831.
As her practice specialized in cases where lack of anger management had caused legal difficulties, she has had to replace her office furniture several times. The latest was in 2023, when the divorcing owners of a martial arts club could not come to a peaceful resolution on an equitable split of family assets. A registered charity, Ex-Cons R Us, hauled her destroyed furniture away. No insurance or other amounts were received with respect to the damage.
The old furniture had a capital cost of $53,000 and the new furniture was purchased for $78,000. The January 1, 2023 Class 8 UCC was $38,160.
In January 2021, Carol acquired a $92,000 Lexus that she used largely for business purposes. In 2023, she had concluded that, given the nature of her clientele, this automobile appeared too luxurious. Based on this view, she traded the Lexus for a $28,000 Toyota automobile. The January 1, 2023 UCC for the Lexus was $17,850. Neither of the automobiles were zero-emission vehicles.
Because the Lexus had been badly damaged by an existing client who lost his case, the trade-in allowance that she received was only $22,000. In 2023, the Toyota was driven 41,000 kilometers, with 38,000 driven for business purposes and only 3,000 for personal use. The operating expenses for the year were $6,150. Assume that the operating expenses for the Lexus were correctly calculated and included in the accounting expenses.
Other 2023 purchases include the following:
New Computer $ 1,250
Applications Software 1,475
Client List from retiring lawyer 32,000
Other 2023 business expenses, determined on an accrual basis, include the following:
Building current expenses $27,300
Payments to Assistants (Note*) 46,100
Miscellaneous Office Expenses 13,600
Meals with Clients (not billed to clients) 15,500
*Note: The payments include $25,000 paid to her 17-year-old daughter. The daughter worked part time during the school year and full time during the summer, doing online research for Carol’s practice. The fees paid to the daughter were considered reasonable (ITA 67).
In 2023, business revenues were $297,800.
Required: Calculate the 2023 business income. In preparing your solution, ignore immediate expensing, CPP issues, and any GST/HST and PST considerations.
Question 4 (15 Marks)
Case A: Indicate two differences between the income tax treatment of business income and property income.
Case B: Briefly describe the “disappearing source” rule.
Case C: Each rental property that is owned by an individual that has a cost more than $50,000 is added to a separate Class. What is the purpose of this separate class treatment?
Case D: Eddy Edwards financed the purchase of an income producing property. The cost of the property was $435,000 and Eddy financed 100% of the purchase. The investment proved successful, with the property being sold for $610,000. He used the sale proceeds to purchase two properties with costs of $495,000 and $115,000 respectively. Is the interest expense on the original loan still deductible and if yes, how does this occur?
Case E: Betty Bond borrows $220,000 to purchase an income producing property. The results from this investment were not promising and, as a result, she sold the investment for $150,000. She used these funds to buy two properties. The first property cost $35,000, while the second property cost $115,000. How will the $220,000 in borrowing be traced to the two properties?
Question 5 (20 Marks)
Mr. Taylor bought a large triplex on February 1, 2022 for a total cost of $345,000. Of this amount, it was estimated that $255,000 was attributable to the building and $90,000 to the land. The three rental units in the triplex were identical in size and features and, for purposes of allocation to a CCA class, the property was a single property.
At a bankruptcy sale in February 2022, Mr. Taylor purchased furniture and appliances for one of the units at a total cost of $12,800.
Early in February 2022, all three units were rented. In 2022, Mr. Taylor’s triplex generated rents of $36,000 and incurred expenses, other than CCA, of $10,900.
In May of 2023, the tenants in the furnished unit moved out and purchased all the furniture and appliances from Mr. Taylor for $7,840. In 2023, Mr. Taylor’s triplex generated rents of $28,400 and incurred expenses, other than CCA, of $18,180.
Mr. Taylor claims the maximum CCA allowable in both 2022 and 2023.
Required: Calculate the rental income for each of 2022 and 2023. Also, determine the UCC balances on January 1, 2024. Include in your solution any income tax consequences associated with the sale of the furniture and appliances. Ignore immediate expensing.
