Annalise Keats is the owner of Sharp, a proprietorship which retails high end knives as well as offering knifesharpening services to restaurants. Its' income statement, as well as notes Annalise has p

Annalise Keats is the owner of Sharp, a proprietorship which retails high end knives as well as offering knife

sharpening services to restaurants. Its' income statement, as well as notes Annalise has prepared, are

attached (Exhibit A). In 2016, Sharp reported $83,000 business income for tax purposes.

Annalise is a divorced mother of 3 sons: 20 year old Wes, 14 year old Connor and 8 year old Asher. Wes and

Asher both have cystic fibrosis which moderately restricts their lifestyles. Wes attends Mount Royal University

full time except for the two summer months. His tuition fees for 2017 were $6,700. Wes works at Sharp when

he is able as a knife sharpener. Asher also helps at Sharp part time on the weekends with cleaning, filing and

doing various odd jobs. Connor is heavily involved in sports so he doesn't participate in the business. Besides

playing on school teams, Connor joined a volleyball club which ran for 5 months, costing Annalise $1,200 in

fees.

Annalise's 62 year old father Frank has been living with the family since he divorced Annalise's 64 year old

mother Bonnie. Bonnie lives with a friend in Edmonton. Bonnie was a stay at home mother so her only

income is from Canada Savings Bonds which paid her $2,900 in 2017. Frank has modest pension income of

$9,300. He handles cleaning and cooking duties for the family in exchange for not paying rent. Frank also

watches Asher after school until Annalise gets home. She paid Frank $4,800 for 2017 for this for which he gave

her receipts. The 2 youngest boys attended an overnight camp in July for 2 weeks for a total cost of $1,100.

In March, Annalise's 43 year old brother Nate began living with the family in their 2 bedroom condo. Given the

cramped circumstances, Annalise bought a modest two story house which the family moved into in June. To

help pay for the new home, Annalise sold a cottage at a lake that her family only used for a few weeks each

summer. Information on these homes is in Exhibit B. Nate was unable to find work in 2017, in part due to his

special needs related to his legal blindness. His only income was $7,250 received under the "Alberta Works"

welfare program.

Annalise divorced her ex-husband Sam in 2012. It was an amicable split so they used the same lawyer to draft

their separation agreement. Terms of the agreements include Sam paying Annalise $1,500 per month for the

three children and $1,200 per month for Annalise. Starting on January 1, 2017, Sam agreed by phone to

increase the amount provided for Annalise to $1,600 per month.

Annalise has a part time job as a legal assistant at a nearby law firm. She kept this job because it has a defined

contribution pension plan as well as a medical/dental benefits family plan. Her employment information is

below:

2017 2016

Salary $18,800 $17,200

Employer RPP premiums 400 350

Employer medical/dental plan premiums 1,250 1,200

Federal income taxes 2,630 2,410

CPP 757 678

EI 306 323

Annalise RPP premiums 300 250

Annalise medical/dental plan premiums 930 850

4

At the end of 2016, Annalise had $45,800 of unused RRSP Deduction Room and $6,000 of undeducted RRSP

contributions carry forward. Other carry forwards from 2016 include $1,000 of charitable donations and a

$21,000 net capital loss carry forward. Annalise has an arrangement with her bank to transfer her RRSP

contribution every month automatically. In 2017, the monthly amount was $250 but starting in January 2018

Annalise increased it to $350 per month. Annalise also contributed $2,400 into an RESP for Asher in 2017.

Annalise owned the following non-registered investments at the beginning of the year:

• 5,000 shares Middleton Ltd, a private Canadian company - adjusted cost base $49,700

• 2,100 shares Delfino Inc., a public Canadian company - adjusted cost base $12,000

During 2017, Annalise had the following transactions:

• Purchased 780 shares of Middleton for $8.25/share on January 13

• Purchased 1,200 shares of Middleton for $10.75/share on April 30

• Sold 600 shares of Middleton to Asher on July 1 for $9 per share. Shares were valued at $14 per share

on that date. Asher sold the shares for $21 per share on December 15.

• Gifted 1,100 shares of Delfino to Connor on September 15 when fair market value was $10 per share.

Connor sold 500 of the shares on December 3rd for $10,000 before brokerage fees.

• Sold jewellery inherited from her grandmother for proceeds of $3,500. Her grandmother originally

purchased the jewellery for $300 in 1943 and it was valued at $2,300 when Annalise received it.

Note:

o All share purchases and sales are subject to a 1.75% brokerage fee except the sales to family

members.

o Middleton shares paid a $2.50 per share non-eligible dividend on November 30.

o Delfino shares paid a $4.00 per share eligible dividend on October 31.

Annalise paid the following medical bills in 2017:

Frank $4,900 Dental work (no coverage)

Asher 650 Prescription glasses (no coverage)

Connor 1,600 Physical therapy (plan covers 50%)

Annalise 3,800 Prescription medicines (plan covers 80%)

Annalise paid $6,400 in instalment payments for 2017.

5

Required: Using Microsoft Excel, respond to the following requirements. All work must be shown to obtain

full marks.

Part A

Discuss fully the treatment of the monthly payments Annalise receives from her ex-spouse Sam.

Part B

It is currently February 23, 2018 and Annalise is wondering what her maximum deductible contribution to her

RRSP would be. Calculate this amount for her.

For the remaining Parts, assume that it is now April 14, 2018 and the Annalise's actual RRSP contribution

made on February 23, 2018 was $10,000.

Part C

Prepared Sharp's 2017 income statement for tax purposes. Where revisions have been made to the cash

income statement, clearly show your work using schedules and/or explanations.

Part D

Determine whether the principal residence exemption should be used for the sale of the condo or the cottage.

Clearly indicate the years designated to each property.

Part E

Determine minimum Net Income for Tax Purposes and Taxable Income for the 2017 taxation year for Wes,

Connor, Asher, Frank, Bonnie and Nate. Also, determine Federal Taxes Payable and Net Federal Taxes Owing

for Wes. Ignore any GST or PST considerations. Show all work, even if the result is zero.

Part F

1. Determine minimum Net Income for Tax Purposes, Taxable Income, Federal Taxes Payable and Net Federal

Taxes Owing for the 2017 taxation year for Annalise. Ignore any GST or PST considerations. For any

amounts provided but excluded from your calculations (excluding amounts found in the Exhibit) explain

why they have been excluded. Ignore any GST or PST considerations. Show all work, even if the result is

zero.

2. Determine any amounts available for carry forward for Annalise and her family at the end of 2017.

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Exhibit A

Cash Income Statement for Sharp

For the year ending December 31, 2017

The building was purchased in 2014 for $476,000 including $74,000 for land. It was used as a retail store

until Annalise determined that her mobile store offered a much better profit margin. The store was sold in

December 2017. This was the only building Sharp owned in 2017. Class 1 had a UCC balance of $325,000 at

the start of 2017.

Sharp has two trucks used to provide mobile knife sharpening to its commercial customers. During 2017,

Annalise sold one truck and replaced it with a new truck. Opening UCC for the trucks was $26,300.

Wages expense includes the following amounts for the children:

Wes 17,300

Connor 9,000

Asher 700

Vehicles expense includes $13,900 to replace the transmission on the remaining old truck.

Entertainment expense included $1,400 for an annual party for Annalise and her employees and their

spouses as well as $200 for a visit to the Calgary Zoo for Nate and the children.

Advertising expense includes $3,200 for a spot on a US website page focusing on Calgary restaurateurs.

Note: Ignore CPP calculations on self-employed business income.

BONUS: Discuss how CPP on self-employed business income is treated for tax purposes.

Building sale proceeds 2 37,000

Land sale proceeds 2 53,000

Sales 2 05,400

Sharpening revenues 7 6,112

Truck sale proceeds 3 ,900

Wages expense ( 109,700)

Knives purchases ( 68,100)

Truck cost ( 42,100)

Vehicles expense ( 26,900)

Entertainment expense ( 15,601)

Advertising expense ( 14,700)

Miscellaneous expenses ( 8,556)

Charitable donations ( 4,000)

Computer cost ( 1,320)

Income 4 84,435

7

Exhibit B

House Information

The condo was purchased by Annalise in 2015 for $430,000. The cottage was originally purchased by Sam in

1986 for $26,000. As part of the divorce proceedings, Annalise received the cottage when it was valued at

$108,000. At this time, the couple elected out of the spousal rollover and claimed the principal residence

exemption designating the years 1986 to 2011. The two story house was purchased for $436,000 plus real

estate and lawyer fees of 20,000.

The condo sold for a price of $465,000 less real estate and lawyer fees of $18,500. The cottage was sold to a

friend for $145,000 less fees of $8,500.

While cleaning out the cottage for sale, Asher found an original Star Wars replica light saber that was

purchased for $35. Annalise auctioned the saber on EBay for $4,600.