QUESTION
On January 10, 2018. Ms. Arlene Arsenault formally separated from her husband and retained custody of her 15-year-old son, Jerry. Jerry has no income during 2018. Ms. Arsenault is also responsible for her 20-year-old daughter, Janine, who has severe and prolonged disability (a medical doctor has certified her disability on Form T2201). Janine has an income of $6,000, resulting from income on investments that were left to her by her grandmother.
In order to get a fresh start in life, Ms. Arsenault found a new job. She resigned from her position in Ottawa and moved to a similar position in Toronto. The move took place on October 31, 2018. She has asked for your assistance in preparing an estimate on her 2018 personal tax liability and, in order to assist you with your calculations, she has prepared the following list of transactions that occurred during 2018:
- Her gross salary from her Ottawa employer, a large public company, for the first 10 months of the year was $82,000. Her employer withheld from this amount CPP contributions of $2,594, EI premiums of $858, and RPP contributions of $2,500. The employer also contributed $2,500 to the company’s RPP on her behalf.
Before leaving her Ottawa employer, she exercised stock option to acquire 2,000 of the company’s shares at a price of $15 per share. The options were issued in 2016, when the market price of the shares was $12 per share. On August 12, 2018, the day after she exercised the options, the shares were trading at $20 per share. Ms. Arsenault sells the shares as soon as she acquires them. Brokerage fees totaled $350 on the sale.
- During November and December, her gross wages with her Toronto employer amounted to $13,000. Her new employer withheld CPP contributions of $500, EI premiums of $390, and $650 in RPP contributions. Her Toronto employer also contributed $650 to the company’s money purchase on her behalf.
Ms. Arsenault found a new home in Toronto during her September house hunting trip there. The legal arrangements for the house purchase were finalized on October 10. In Ottawa, she and her husband had lived for 10 years in a home that they rented. Her agreement with her new employer requires that they pay her moving costs. In order to simplify the record keeping, the employer paid her an allowance of $7,500 and did not require a detailed accounting of expenses. Her actual expenses were as follows:
Moving company charges $ 3,800
Airfare for September Toronto trip to acquire new home 350
Meals and lodging on September Toronto trip 275
Gas for October 31 move to Toronto 65
Lodging in Ottawa on October 10 110
Meals on October 30 and October 31 While Moving 250
Charges for cancellation of lease on Ottawa home 935
Legal and other fees on acquisition of Toronto home 1,500
Total $7,285
Ms. Arsenault did not use the simplified method of calculating vehicle expenses and moving costs.
- In 2015, Ms. Arsenault’s mother died, leaving her 5,000 shares of Lintz Industries, a private company. These shares had cost her mother $50,000 and had a fair market value at the time of her death of $95,000. Ms. Arsenault received non-eligible dividends of $7,500 on these shares in May and, in December, she sells the shares for $105,000. Selling costs were $850.
- Ms. Arsenault made $1,500 in donations to a registered Canadian charity and $900 in contributions to the Libcon Rebloc Party, a registered federal political party.
- Ms. Arsenault incurred the following child care costs:
Payments to Individuals for Jerry and Janine $ 7, 160
Fees for Jerry to Attend Camp (4 Weeks at $200 Per Week) 800
Food and Clothing for the Children 6,400
Total 14,360
- Ms. Arsenault paid the following medical expenses:
For Herself $ 9,700
Jerry 900
Janine 7,250
Total $17,850
- In previous years, Ms. Arsenault’s husband took care of her financial affairs. She has no understanding of either RPP’s or RRSP’s but will make the maximum deductible RRSP contribution for 2018 as soon as you have calculated it. Her RRSP Deduction Limit Statement for the CRA states that her 2017 Earned Income was $81,100 and that, at the of 2017, she had no Unused RRSP Deduction Room. Her 2017 T4 from her employer indicates a Pension Adjustment of $4,500. There are no undeducted contributions in her RRSP.
- During the year, Ms. Arsenault paid legal fees of $2,500 in connection with her separation agreement. This settlement requires her husband to make a lump sum payment of $25,000 on March 1, 2018, as well as child support payments of $4,000 at the end of each month beginning on January 31, 2018. All required payments were received for the year.
- In addition to her employment income, Ms. Arsenault operates an unincorporated mail order business with a December 31 year end. Her net business income for 2018 totaled $22,500. Included in this amount is a deduction of $950 for interest that she paid on a demand loan taken out to finance inventory purchases. During the year ending December 31, 2018, Ms. Arsenault withdraws $27,000 from the bank account maintained by the business.
REQUIRED:
- Determine Ms. Arsenault’s minimum net income for tax purposes and her minimum taxable income for 2018. Ignore any HST considerations. In the net income for tax purposes calculation, provide separate disclosure of:
- Net Employment Income
- Net Business and Property Income
- Net Taxable Capital Gains
- Other Sources of Income; and
- Other Deductions from Income
- Based on your answer to Part A, calculate Ms. Arsenault’s minimum federal tax payable and other amounts owing to (refundable from) the CRA for 2018. Ignore any income tax withholdings that her employers would have made.
ANSWER
| MS. ARSENAULT INCOME AND TAX CALCULATION FOR 2018 | |||
| 1 | |||
| SL | PARTICULARS | AMOUNT $ | |
| A | NET EMPLOYMENT INCOME | 84,573.00 | |
| B | NET BUSINESS AND PROPERTY INCOME | 21,550.00 | |
| C | NET TAXABLE CAPITAL GAINS | 18,800.00 | |
| D | OTHER SOURCES OF INCOME | 86,500.00 | |
| E | OTHER DEDUCTION FROM INCOME | 34,610.00 | |
| 2 | |||
| A | PARTICULARS | AMOUNT $ | AMOUNT $ |
| INCOME FROM JANIINE (HER DAUGHTER) | 6,000.00 | ||
| NET SALARY INCOME | 84,573.00 | ||
| CAPITAL GAIN FROM OTTAWA SHARE | 9,650.00 | ||
| DIVIDENDS | 7,500.00 | ||
| CAPITAL GAIN FROM LINTZ INDUSTRIES SHARE | 9,150.00 | ||
| LUMSUMP PAYMENT RECEIVED | 25,000.00 | ||
| CHILD SUPPORT PAYMENT | 48,000.00 | ||
| NET INCOME FROM BUSINESS | 21,550.00 | ||
| 2,11,423.00 | |||
| LESS:- | |||
| DONATION TO PARTY | 1,500.00 | ||
| DONATION TO LIBCON PARTY | 900.00 | ||
| CHILD CARE COST | 14,360.00 | ||
| MEDICAL EXPENSES | 17,850.00 | ||
| 34,610.00 | |||
| NET TOTAL INCOME | 1,76,813.00 | ||
| Less : Base Amount | 1,47,667.00 | ||
| NET INCOME | 29,146.00 | ||
| FEDERAL TAX RATE @ 29% | 8,452.00 | ||
| TAX ON THE BASE AMOUNT | 30,535.00 | ||
| TOTAL TAX | 38,987.00 | ||
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