ADMS4561 Winter 2022- Midterm all Questions

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Feb 20, 2024

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Midterm Question 1 (28 marks, 50 min.) released at 5:00 pm (60 minute deadline 6:00 pm ) It is January 15, 2021. PPE Inc. (“PPE”) is a Canadian-Controlled Private Corporation located in Toronto which manufactures personal protective equipment and is a GST/HST registrant. PPE is examining the benefits it provides to its employees and has asked you to comment on the income tax and GST/HST implications the following potential benefits to both PPE and the employees: 1. Group Disability Insurance. The premiums will be split 50/50 between PPE and the employee 2. Private Medical Plan. The premiums will be split 50/50 between PPE and the employee. 3. Employee Share Ownership Plan (Stock Option Plan). PPE plans to establish an employee share ownership plan for senior employees. The employees are arm’s length with PPE. PPE will initially grant options to each qualifying employee to purchase 3,000 shares at $5 per share. The fair market value of the shares at the time of grant is estimated to be $7 per share. The options will be exercisable at 1,000 shares per year for 2022, 2023 and 2024. When exercised, each employee will own less than 1% of PPE. 4. Share Loan. PPE is planning to provide loans to the employees to purchase the shares in point 4. The loans will bear interest at 1% and the employees will sign a loan agreement with bona fide repayment terms to repay the loan over 5 years. 5. Company Cars. PPE is planning to provide company cars to its sales force. It is going to purchase zero emission vehicles which will cost $65,000 each plus HST. PPE would like an example taxable benefit calculation assuming the employee has the car for 11 months in the year and drives 30,000 km in the eleven months of which 22,500 are for work purposes. PPE will not pay car operating expenses but will provide the employee with a Form T2200 certifying that the employee is required to pay them. REQUIRED: Provide PPE with the information requested. Ignore any COVID modifications.

Midterm Question 2 (22 marks, 40 min.) released at 6:00 pm (50 minute deadline 6:50 pm) Beth and Ripley, a married couple, own 51% and 49%, respectively, of RanchCo., a Canadian controlled private corporation (“CCPC”), that provides equestrian equipment to horse farms across Canada. RanchCo. does not have any customers outside of Canada. RanchCo. has a small investment portfolio and also owns 95% of SubCo., a CCPC. Ripley, owns 100% of HoldCo., a CCPC., which owns the remaining 5% of SubCo. All corporations have a December 31 fiscal year-end. Information regarding each entity and activity during the 2021 year is provided below. SubCo. In March 2021, SubCo. paid a $60,000 non-eligible dividend. SubCo. It is expected that SubCo. will receive a dividend refund of $10,000: $7,000 from its NERDTOH and $3,000 from its ERDTOH. SubCo. did not have any further activity during 2021, other than a small amount of interest income earned from the corporation’s savings account. HoldCo. HoldCo. owns the land and building in which RanchCo. operates its business. RanchCo. pays HoldCo. $100,000 per year of rental income for the use of the premises. HoldCo. incurs $50,000 of deductible expenses per annum for general maintenance and upkeep on the property. HoldCo. will always claim the small business deduction to the extent that it can. HoldCo. does not have any employees. The only other income HoldCo. earned in 2021 was the dividend income from SubCo. RanchCo. In 2021, earned $950,000 of active business income, which has been computed correctly. In addition to this active business income and SubCo. dividend income detailed above, RanchCo. earned $25,000 of interest income from its bond portfolio and $32,000 of eligible dividend income from shares of Canadian public corporations. RanchCo.’s Part I tax is correctly calculated as $125,167. In 2021 RanchCo. paid an eligible dividend of $50,000. RanchCo. did not pay any dividends in 2020. Continued on next page

Client Requests Beth and Ripley’s son, Cole, has become more interested in tax after taking his second university tax course. He is confused about the ERDTOH and NERDTOH calculations, so as long-time clients of your firm, Beth asked the partner on the engagement for a calculation to support RanchCo.’s NERDTOH balance as at December 31, 2021. As at December 31, 2020, RanchCo.’s opening NERDTOH and ERDTOH balances were $30,000 and $6,000, respectively. RanchCo. did not pay any dividends in the 2020 year. Cole has also asked for a proper written explanation on which companies are associated with RanchCo., and if RanchCo., HoldCo. and SubCo. are connected corporations. Cole would also like a written explanation on whether HoldCo.’s rental income will be eligible for the small business deduction, and if so, how much of the small business deduction is available to HoldCo. and RanchCo. in 2021. Cole has also requested a calculation of the total Part IV tax, if any, HoldCo. will pay on receipt of the non-eligible dividend from SubCo. Lastly, Beth wants to know how much of an eligible dividend RanchCo. could pay in the 2022 year based on these 2021 figures. RanchCo.’s GRIP balance at the end of 2020 was $75,000.

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Midterm Question 3 (17 marks, 30 min.) released at 6:50 pm (40 minute deadline 7:30 pm ) You are a CPA in the tax group of your firm. It is February 6, 2022. Karen is an internationally respected modern dancer and choreographer and is a client of your firm. She has two types of activities related to modern dance which are described below. She is the artistic director of the Toronto Dance Company, a non-profit corporation. The position of artistic director is somewhat like being a CEO. As artistic director, she makes decisions, in conjunction with the board of directors, such as which dance works will be performed by the company and when, which dancers, musicians and other artists will be hired by the company. She rehearses the performers in the works to be performed. Sometimes she also performs for the company. The company provides her with an office, rehearsal space, computers, phones etc. When she performs, the company provides the costumes, stage makeup and similar tools of the trade. Although she has some flexibility in terms of her time, once schedules for rehearsals and performance are set, she must adhere to them. She has an indefinite contract for a fixed annual salary which is reviewed annually. The salary is paid on a monthly basis and source deductions like income tax and CPP are made. The company has a benefit plan which provides group term life insurance, disability insurance and a medical benefits, all of which are paid for by the company. The company does tour, performing around the world. When the company tours, Karen goes with them. The company pays all of her travel expenses. She estimates that her work as artistic director takes up about 75% of her working time. Karen also choreographs dance pieces for other dance and theatre groups. For this type of work, she charges a flat fee for creating the piece. She does not receive any benefits. She determines the nature of the piece and the timing of when she will work with performers to create it. The party for which she is creating the piece will provide her with the studio space in which to create the piece. If she requires a choreographic assistant, it is her responsibility to pay that person. Also, if she has to travel to create the piece, her travel expenses are usually her responsibility although she seldom has to pay for accommodation as she usually stays with the artistic director of the company for which she is creating the work. Practically speaking, where she will incur significant expenses, she takes them into account when negotiating the flat fee for creating the work. The partner on Karen’s engagement is concerned as to how these two types of income should be treated for tax purposes. REQUIRED: Prepare a memorandum to the partner providing the information requested as noted above. You may use point form where appropriate in the body of the memorandum. You do not have to cite any sections of the Income Tax Act. Be sure to analyze both of the two types of income as they are worth equal marks.

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